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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-11204
USBANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
PENNSYLVANIA 25-1424278
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
MAIN & FRANKLIN STREETS, P.O. BOX 430, JOHNSTOWN, 15907-0430
PENNSYLVANIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (814)533-5300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
<TABLE>
<S> <C>
COMMON STOCK, $2.50 PAR VALUE SHARE PURCHASE RIGHTS
(TITLE OF CLASS) (TITLE OF CLASS)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405.) $139,822,977.00 as of January 31,
2000.
NOTE -- If a determination as to whether a particular person or entity is an
affiliate cannot be made without involving unreasonable effort and expense, the
aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this Form.
Applicable only to registrants involved in bankruptcy proceedings during the
preceding five years: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Sections 12, 13, or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. [ ] Yes [ ] No
(Applicable only to corporate registrants) Indicate the number of shares
outstanding of each of the registrant's classes of common stock, as of the
latest practicable date. 13,316,474 shares were outstanding as of January 31,
2000.
DOCUMENTS INCORPORATED BY REFERENCE. List hereunder the following documents
if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part
II, etc.) into which the document is incorporated: (1) Any annual report to
security holders; (2) Any proxy or information statement; and (3) Any prospectus
filed pursuant to Rule 424(b) or (e) under the Securities Act of 1933. The
listed documents should be clearly described for identification purposes (e.g.,
annual report to security holders for fiscal year ended December 24, 1980).
Portions of the annual shareholders' report for the year ended December 31,
1999, are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual shareholders' meeting are
incorporated by reference in Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Exhibit Index is located on page 70.
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FORM 10-K INDEX
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 11
Item 6. Selected Consolidated Financial Data........................ 12
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations............... 14
Item 7A Quantitative and Qualitative Disclosures about Market
Risk........................................................ 30
Item 8. Consolidated Financial Statements and Supplementary Data.... 31
Item 9. Changes In and Disagreements With Accountants On Accounting
and Financial Disclosure.................................... 69
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 69
Item 11. Executive Compensation...................................... 69
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 69
Item 13. Certain Relationships and Related Transactions.............. 69
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules, and
Reports on Form 8-K......................................... 69
Signatures.................................................. 72
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
USBANCORP, Inc. (the "Company") is a registered bank holding company
organized under the Pennsylvania Business Corporation Law and is registered
under the Bank Holding Company Act of 1956, as amended (the "BHCA.") The Company
became a holding company upon acquiring all of the outstanding shares of U.S.
Bank ("U.S. Bank") on January 5, 1983. The Company also acquired all of the
outstanding shares of Three Rivers Bank and Trust Company ("Three Rivers Bank")
in June 1984, McKeesport National Bank ("McKeesport Bank") in December 1985
(which was subsequently merged into Three Rivers Bank), Community Bancorp, Inc.
in March 1992 (which was also subsequently merged into Three Rivers Bank in July
1997), and Johnstown Savings Bank ("JSB") in June 1994 (which was immediately
merged into U.S. Bank). Immediately following the acquisition of JSB, U.S. Bank
caused the intracompany transfer by Standard Mortgage Corporation of Georgia, a
wholly-owned subsidiary of JSB, of all its assets, subject to all of its
liabilities, to SMC Acquisition Corporation, an indirect subsidiary of
Community. SMC Acquisition Corporation was renamed Standard Mortgage Corporation
of Georgia and is a mortgage banking company organized under the laws of the
State of Georgia that originates, sells, and services residential mortgage
loans. In addition, the Company formed United Bancorp Life Insurance Company
("United Life") in October 1987, USBANCORP Trust and Financial Services Company
(the "Trust Company") in October 1992, and UBAN Associates, Inc. ("UBAN
Associates"), in January 1997. UBAN Associates is a registered investment
advisory firm that administers investment portfolios, offers operational support
systems and provides asset and liability management services to small and
mid-sized community banks. The Company's principal activities consist of owning
and operating its five wholly-owned subsidiary entities. At December 31, 1999,
the Company had, on a consolidated basis, total assets, deposits, and
shareholders' equity of $2.47 billion, $1.23 billion and $113 million,
respectively. The Company and the subsidiary entities derive substantially all
of their income from banking and bank-related services. The Company functions
primarily as a coordinating and servicing unit for its subsidiary entities in
general management, credit policies and procedures, accounting and taxes, loan
review, auditing, investment advisory, compliance, marketing, insurance risk
management, general corporate services, and financial and strategic planning.
The Company, as a bank holding company, is regulated under the BHCA, and is
supervised by the Board of Governors of the Federal Reserve System (the
"Board").
As discussed in Note #25, on July 12, 1999, the Company announced that its
Board of Directors has approved a plan to split the Company's banking
subsidiaries into two separate publicly traded companies. The plan would be
effected through a tax-free spin-off, and is expected to become effective April
1, 2000.
USBANCORP BANKING SUBSIDIARIES:
U.S. Bank
U.S. Bank is a state bank chartered under the Pennsylvania Banking code of
1965, as amended. Through 23 locations in Cambria, Centre, Clearfield, Somerset,
and Westmoreland Counties, Pennsylvania, U.S. Bank conducts a general banking
business. It is a full-service bank offering (i) retail banking services, such
as demand, savings and time deposits, money market accounts, secured and
unsecured loans, mortgage loans, safe deposit boxes, holiday club accounts,
collection services, money orders, and traveler's checks; (ii) lending,
depository and related financial services to commercial, industrial, financial,
and governmental customers, such as real estate-mortgage loans, short- and
medium-term loans, revolving credit arrangements, lines of credit, inventory and
accounts receivable financing, commercial equipment lease financing, real
estate-construction loans, business savings accounts, certificates of deposit,
wire transfers, night depository, and lock box services;
U.S. Bank also operates 27 automated bank teller machines ("ATM"s) through
its 24-Hour Banking Network which is linked with MAC, a regional ATM network and
CIRRUS, a national ATM network. U.S. Bank also has a wholly owned mortgage
banking subsidiary -- UBAN Mortgage Company. UBAN Mortgage Company was formed in
January 1997 for the purpose of originating and selling mortgage loans primarily
in
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Western Pennsylvania. Additionally, USNB Financial Services Corporation, a
wholly owned subsidiary of U.S. Bank, was formed on May 23, 1997. USNB Financial
Services Corporation engages in the sale of annuities, mutual funds, and
insurance. U.S. Bank's deposit base is such that loss of one depositor or a
related group of depositors would not have a materially adverse effect on its
business. In addition, the loan portfolio is also diversified so that one
industry or group of related industries does not comprise a material portion of
the loan portfolio. U.S. Bank's business is not seasonal nor does it have any
risks attendant to foreign sources.
In October 1998, U.S. Bank changed its charter from a national bank to a
state bank. Under the new charter U.S. Bank is subject to supervision and
regular examination by the Federal Reserve and the Pennsylvania Department of
Banking. Various federal and state laws and regulations govern many aspects of
its banking operations. The following is a summary of key data (dollars in
thousands) and ratios at December 31, 1999:
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Headquarters................................................ Johnstown, PA
Chartered................................................... 1933
Total Assets................................................ $1,339,870
(54.3% of the Company's total)
Total Investment Securities................................. $ 660,851
(55.7% of Company's total)
Total Loans (net of unearned income)........................ $ 578,472
(52.8% of the Company's total)
Total Deposits.............................................. $ 658,246
(53.5% of the Company's total)
Total Net Income............................................ $ 12,901
(63.2% of the Company's total)
Asset Leverage Ratio........................................ 6.42%
1999 Return on Average Assets............................... 0.96%
1999 Return on Average Equity............................... 12.83%
Total Full-time Equivalent Employees........................ 370
(49.7% of the Company's total)
Number of Offices........................................... 23
(47.7% of the Company's total)
</TABLE>
Three Rivers Bank
Three Rivers Bank is a state bank chartered under the Pennsylvania Banking
Code of 1965, as amended. Through 23 locations in Allegheny, Westmoreland and
Washington Counties, Pennsylvania, Three Rivers Bank conducts a general retail
banking business consisting of granting commercial, consumer, construction,
mortgage and student loans, and offering checking, interest bearing demand,
savings and time deposit services. It also operates 24 ATMs that are affiliated
with MAC, a regional ATM network, and Plus System, a national ATM network.
Three Rivers Bank also offers wholesale banking services to other banks,
merchants, governmental units, and other large commercial accounts. Such
services include balancing services, lock box accounts, and providing coin and
currency. Three Rivers Bank also has a wholly owned mortgage banking
subsidiary -- Standard Mortgage Corporation. Standard Mortgage Corporation,
based in Atlanta, Georgia, is a mortgage banking company that originates, sells,
and services residential mortgage loans. Additionally, TRB Financial Services
Corporation, a wholly owned subsidiary of Three Rivers Bank was formed on August
5, 1997. TRB Financial Services Corporation engages in the sale of annuities and
mutual funds.
Under a tax-free spin-off plan, 100% of the shares of the holding company
to be formed for Three Rivers Bank, to be known as Three Rivers Bancorp, Inc.,
would be distributed as a dividend to the shareholders of the Company in
proportion to their existing Company ownership. Shareholders would retain their
existing
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Company shares. Standard Mortgage Company (SMC), a mortgage banking company,
currently a subsidiary of Three Rivers Bank, will be internally spun-off from
Three Rivers Bank to the Company prior to consummation of the proposed Three
Rivers Bank spin-off. For more information on the proposed spin-off, see
"Proposed Tax-Free Spin-Off Plan" in the MD&A.
Three Rivers Bank's deposit base is such that loss of one depositor or a
related group of depositors would not have a materially adverse effect on its
business. In addition, the loan portfolio is also diversified so that one
industry or group of related industries does not comprise a material portion of
the loan portfolio.
Three Rivers Bank's business is not seasonal nor does it have any risks
attendant to foreign sources.
As a state chartered, federally-insured bank and trust company which is not
a member of the Federal Reserve System, Three Rivers Bank is subject to
supervision and regular examination by the Pennsylvania Department of Banking
and the Federal Deposit Insurance Corporation. Various federal and state laws
and regulations govern many aspects of its banking operations. The following is
a summary of key data (dollars in thousands) and ratios at December 31, 1999:
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Headquarters............................................... McKeesport, PA
Chartered.................................................. 1965
Total Assets............................................... $1,120,809
(45.4% of the Company's total)
Total Investment Securities................................ $ 522,264
(44.0% of Company's total)
Total Loans (net of unearned income)....................... $ 517,332
(47.2% of the Company's total)
Total Deposits............................................. $ 572,695
(46.5% of the Company's total)
Total Net Income........................................... $ 9,940
(48.7% of the Company's total)
Asset Leverage Ratio....................................... 6.21%
1999 Return on Average Assets.............................. 0.91%
1999 Return on Average Equity.............................. 15.01%
Total Full-time Equivalent Employees....................... 324
(43.6% of the Company's total)
Number of Offices.......................................... 23
(52.3% of the Company's total)
</TABLE>
USBANCORP NON-BANKING SUBSIDIARIES:
United Life
United Life is a captive insurance company organized under the laws of the
State of Arizona. United Life engages in underwriting as reinsurer of credit
life and disability insurance within the Company's six county market area.
Operations of United Life are conducted in each office of the Company's banking
subsidiaries. United Life is subject to supervision and regulation by the
Arizona Department of Insurance, the Insurance Department of the Commonwealth of
Pennsylvania, and the Board of Governors of the Federal Reserve Bank. At
December 31, 1999, United Life had total assets of $2.7 million and total
shareholder's equity of $1.4 million.
USBANCORP Trust and Financial Services Company
USBANCORP Trust and Financial Services Company is a trust company organized
under Pennsylvania law in October 1992. USBANCORP Trust and Financial Services
Company was formed to consolidate the trust functions of U.S. Bank and Three
Rivers Bank and to increase market presence. As a result of this formation, the
Trust Company now offers a complete range of trust services through each of the
Company's
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subsidiary banks. At December 31, 1999, USBANCORP Trust and Financial Services
Company had $1.43 billion in assets under management which included both
discretionary and non-discretionary assets.
EXECUTIVE OFFICERS
Information relative to current executive officers of the Company or its
subsidiaries is listed in the following table:
<TABLE>
<CAPTION>
NAME AGE OFFICE WITH USBANCORP, INC. AND/OR SUBSIDIARY
- ---- --- ---------------------------------------------
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Terry K. Dunkle...................... 58 Chairman, President & Chief Executive Officer of
USBANCORP, Inc., and Chairman of U.S. Bank, Three
Rivers Bank, and USBANCORP Trust and Financial
Services Company
Orlando B. Hanselman................. 40 Executive Vice President of USBANCORP, Inc., and
President & Chief Executive Officer of U.S. Bank.
W. Harrison Vail..................... 59 President & Chief Executive Officer of Three Rivers
Bank
Ronald W. Virag, CFTA................ 54 President & Chief Executive Officer, USBANCORP Trust
and Financial Services Company
Kevin J. O'Neil...................... 62 President & Chief Executive Officer, Standard Mortgage
Corporation of Georgia
</TABLE>
Mr. Dunkle succeeded Clifford A. Barton in February 1994, as Chairman,
President and Chief Executive Officer of USBANCORP. In April 1988, Mr. Dunkle
was appointed as President and Chief Executive Officer of U.S. Bank and
Executive Vice President and Secretary of USBANCORP. Mr. Dunkle served the five
previous years as Executive Vice President of Commonwealth National Bank in
Harrisburg, Pennsylvania. Mr. Hanselman joined U.S. Bank in January 1987 as Vice
President and Chief Financial Officer and was appointed Executive Vice President
in February 1994. In May 1995, Mr. Hanselman was awarded the expanded
responsibility of President and Chief Executive Officer of U.S. Bank. Mr. Vail
has been President and Chief Executive Officer of Three Rivers Bank since
January 1985. Mr. Virag was appointed as President and Chief Executive Officer
of USBANCORP Trust and Financial Services Company in November 1994. Prior to
joining the Trust Company, Mr. Virag served as Senior Vice President and head of
trust group for Bank One in Charleston, West Virginia. Mr. O'Neil is President
and Chief Executive Officer of Standard Mortgage Corporation of Georgia, a
wholly-owned mortgage banking subsidiary of Three Rivers Bank. Mr. O'Neil joined
the Company through the acquisition of JSB, and has 30 years of mortgage banking
experience.
MONETARY POLICIES
Commercial banks are affected by policies of various regulatory authorities
including the Federal Reserve System. An important function of the Federal
Reserve System is to regulate the national supply of bank credit. Among the
instruments of monetary policy used by the Board of Governors are: open market
operations in U.S. Government securities, changes in the discount rate on member
bank borrowings, and changes in reserve requirements on bank deposits. These
means are used in varying combinations to influence overall growth of bank
loans, investments, and deposits, and may also affect interest rate charges on
loans or interest paid for deposits. The monetary policies of the Board of
Governors have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future.
COMPETITION
The subsidiary entities face strong competition from other commercial
banks, savings banks, savings and loan associations, and several other financial
or investment service institutions for business in the communities they serve.
Several of these institutions are affiliated with major banking and financial
institutions, such as Mellon Bank Corporation and PNC Financial Corporation,
which are substantially larger and have greater financial resources than the
subsidiary entities. As the financial services industry continues to
consolidate, the scope of potential competition affecting the subsidiary
entities will also increase. For most of the services that
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the subsidiary entities perform, there is also competition from credit unions
and issuers of commercial paper and money market funds. Such institutions, as
well as brokerage houses, consumer finance companies, insurance companies, and
pension trusts, are important competitors for various types of financial
services. In addition, personal and corporate trust investment counseling
services are offered by insurance companies, other firms, and individuals.
MARKET AREA
The Western Pennsylvania market experienced positive economic performance
in 1999. Labor markets throughout the region have remained tight and
unemployment at record low levels. Greater diversity into the service sector
with specialization in "high tech" has allowed the region some insulation from
the once dominant manufacturing sector. Not unlike the national trend, the
region has been experiencing economic growth through strong consumer spending
and business expansion. Consumer confidence remains high, business inventories
remain low and require replacement, and commercial building remains brisk in the
region.
The region is experiencing positive annual economic expansion estimated
between three and five percent, only slightly less than national performance.
Inflation has remained fairly benign and has only recently appeared in energy
prices. While expectations remain bright, we expect the regional economy to slow
slightly over the first half 2000 before settling into a more stable pace over
the later part of the year. This projection results from expectations that the
Federal Reserve will raise short interest rates several times in order to slow
economic growth to a more reasonable, non-inflationary pace between two and
three percent.
The Western Pennsylvania market should experience moderate growth in 2000.
An emphasis on technologically oriented growth has resulted in a more
diversified economy, but overall growth will continue to be hindered by
demographic trends. Job growth is expected to be behind the national pace, but
our unemployment rate will remain low in comparison to that experienced in
recent past. Building activity is expected to slow. This slowdown from the hot
pace experienced in 1999 will result primarily from higher interest rates.
Economic conditions in the region are better today than they have been in a
long time. We believe that economic stability is important for the region and
the Federal Reserve will provide the discipline to allow future positive
expansion for a sustained period of time.
EMPLOYEES
The Company employed approximately 832 persons as of December 31, 1999, in
full- and part-time positions. Approximately 275 non-supervisory employees of
U.S. Bank are represented by the United Steelworkers of America, AFL-CIO-CLC,
Local Union 8204. U.S. Bank and such employees are parties to a labor contract
pursuant to which employees have agreed not to engage in any work stoppage
during the term of the contract which will expire on October 15, 2003. U.S. Bank
has not experienced a work stoppage since 1979. The Company successfully
negotiated a four-year collective bargaining agreement with the local union
which took effect October 16, 1999. Key provisions of the new contract include:
A modernized profit sharing formula, 2% contribution to the 401(k) account for
each employee, increased staffing flexibility and wage increases of 3% in each
of the first three years and 4% in the fourth year.
COMMITMENTS AND LINES OF CREDIT
The Company's banking subsidiaries are obligated under commercial, standby,
and trade-related irrevocable letters of credit aggregating $22.7 million at
December 31, 1999. In addition, the subsidiary banks have issued lines of credit
to customers generally for periods of up to one year. Borrowings under such
lines of credit are usually for the working capital needs of the borrower. At
December 31, 1999, the Company's banking subsidiaries had unused loan
commitments of approximately $240.3 million.
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STATISTICAL DISCLOSURES FOR BANK HOLDING COMPANIES
The following Guide 3 information is included in this Form 10-K as listed
below:
<TABLE>
<C> <S>
I. Distribution of Assets, Liabilities, and Stockholders'
Equity; Interest Rates and Interest Differential
Information.
Information required by this section is presented on pages
18, 19, 25, 26, 27, 28 and 29.
II. Investment Portfolio
Information required by this section is presented on pages
7, 8, 43, 44 and 45.
III. Loan Portfolio
Information required by this section appears on pages 8, 9,
45, 46 and 47.
IV. Summary of Loan Loss Experience
Information required by this section is presented on pages
20, 21, 22 and 46.
V. Deposits
Information required by this section follows on pages 9, 10
and 49.
VI. Return on Equity and Assets
Information required by this section is presented on page
12.
VII. Short-Term Borrowings
Information required by this section is presented on pages
48 and 49.
</TABLE>
INVESTMENT PORTFOLIO
Investment securities held to maturity are carried at amortized cost while
investment securities classified as available for sale are reported at fair
value. At December 31, 1999, 100% of the securities portfolio was classified as
available for sale.
The following table sets forth the book and market value of USBANCORP's
investment portfolio as of the periods indicated:
Investment Securities Available for Sale at:
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<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998 1997
---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Book Value:
U.S. Treasury........................................... $ 15,855 $ 442 $ 2,496
U.S. Agency............................................. 43,599 21,524 1,769
State and municipal..................................... 156,256 11,166 13,516
Mortgage-backed securities.............................. 943,474 577,241 516,476
Other securities........................................ 82,568 47,409 42,370
Total book value of investment securities available for
sale.................................................... $1,241,752 $657,782 $576,627
Total market value of investment securities available for
sale.................................................... $1,187,335 $661,491 $580,115
</TABLE>
During the second half of 1999, the Company in preparation for liquidity
needs for Year 2000 sold $16 million of mortgage backed securities that had been
purchased in 1993 through 1995 and classified as held to maturity. The Company
believed the sales were allowable under the provision of SFAS #115 which permits
the sale of held to maturity mortgage backed securities after a substantial
portion (85%) of the principal had been collected through prepayments. The
Company, however, misinterpreted this provision and computed the 85% paydown
factor against the principal outstanding at issuance as opposed to using the
principal outstanding at the point the Company purchased the securities in the
secondary market. As a result of this interpretation error, the Company tainted
its held to maturity portfolio and transferred all securities classified as held
to maturity to available for sale. The time period for the taint will be two
years. At the time of the transfer, these securities had an amortized cost of
$495.8 million and a market value of $485.4 million. Prior to the transfer,
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approximately 60% of the Company's investment securities were already classified
as available for sale. With the entire portfolio now being classified as
available for sale, the Company will have greater flexibility to manage the
securities portfolio to better achieve overall balance sheet rate sensitivity
goals and provide liquidity to fund loan growth if needed. The mark to market of
the available for sale portfolio does inject more volatility in the book value
of equity but has no impact on regulatory capital.
Investment Securities Held to Maturity at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998 1997
---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Book Value:
U.S. Treasury........................................... $-- $ 17,207 $ 16,320
U.S. Agency............................................. -- 23,928 17,512
State and municipal..................................... -- 147,628 114,733
Mortgage-backed securities.............................. -- 315,171 380,825
Other securities........................................ -- 4,208 2,951
Total book value of investment securities held to
maturity................................................ $-- $508,142 $532,341
Total market value of investment securities held to
maturity................................................ $-- $516,452 $541,093
</TABLE>
The total securities portfolio increased by approximately $17.7 million
between December 31, 1999, and December 31, 1998, and by $53 million between
year ended 1998 and 1997. The growth in 1999 is attributed to the use of the
acquired deposits from the First Western Branch acquisition to purchase
securities. The growth in 1998 resulted from the Company aggressively purchasing
securities due to expected continuation of strong cashflow from mortgage-backed
securities.
At December 31, 1999, investment securities having a book value of $788.6
million were pledged as collateral for public funds, and FHLB borrowings.
The Company and its subsidiaries, collectively, did not hold securities of
any single issuer, excluding U.S. Treasury and U.S. Agencies, that exceeded 10%
of shareholders' equity at December 31, 1999.
Maintaining investment quality is a primary objective of the Company's
investment policy which, subject to certain minor exceptions, prohibits the
purchase of any investment security below a Moody's Investor Service or Standard
& Poor's rating of "A." At December 31, 1999, 97.3% of the portfolio was rated
"AAA" compared to 98.1% at December 31, 1998. Less than 1.5% was rated below "A"
or unrated at December 31, 1999.
LOAN PORTFOLIO
The following table sets forth the Company's loans by major category as of
the dates set forth below:
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial....................... $ 152,042 $ 139,751 $143,113 $138,008 $103,546
Commercial loans secured by real
estate......................... 406,927 341,842 302,620 266,700 179,793
Real estate-mortgage(1).......... 452,507 449,875 440,734 414,003 414,967
Consumer......................... 70,983 88,812 95,272 111,025 133,820
Loans.......................... 1,082,459 1,020,280 981,739 929,736 832,126
Less: Unearned income.......... 8,408 5,276 5,327 4,819 2,716
Loans, net of unearned
income...................... $1,074,057 $1,015,004 $976,412 $924,917 $829,410
</TABLE>
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(1) At December 31, 1999 and 1998, real estate-construction loans constituted
4.5% and 4.9% of the Company's total loans, net of unearned income,
respectively.
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Total loans, net of unearned income, increased by $59.1 million, or 5.8%,
between December 31, 1998, and December 31, 1999. This growth occurred in
commercial mortgage loans which increased by $65.1 million, or 19.0%, and
commercial loans which grew by 12.3 million, or 8.8%. The higher loan totals in
commercial mortgages resulted from increased production from both middle market
and small business lending (loans less than $250,000). This improved new loan
production was due primarily to more effective sales efforts which have included
an intensive customer calling program and canvassing of small commercial
businesses. Other factors contributing to the loan growth were a stable economic
environment and results from two loan production offices in the higher growth
markets of Westmoreland and Centre counties.
Total residential mortgage loans were relatively flat between 1999 and 1998
as growth in adjustable-rate mortgage loans was offset by principal amortization
in the existing fixed-rate mortgage loan portfolio. The Company is also selling
the majority of new fixed-rate mortgage product to assist in asset/liability
positioning and to reduce the Company's overall dependence on residential
mortgage loans. Total consumer loans declined by $17.8 million or 20.0% in 1999,
$6.5 million or 6.8% in 1998, and $15.8 million, or 14.2% in 1997. The drop in
1999 was due to the sale of the Company's $14 million credit card portfolio and
continued net run-off in the indirect auto loan portfolio.
The amount of loans outstanding by category as of December 31, 1999, which
are due in (i) one year or less, (ii) more than one year through five years, and
(iii) over five years, are shown in the following table. Loan balances are also
categorized according to their sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
MORE
THAN
ONE YEAR
ONE YEAR THROUGH OVER TOTAL
OR LESS FIVE YEARS FIVE YEARS LOANS
-------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
Commercial.................................... $ 43,757 $ 77,641 $ 30,644 $ 152,042
Commercial loans secured by real estate....... 59,334 125,673 221,920 406,927
Real estate-mortgage.......................... 32,505 72,387 347,615 452,507
Consumer...................................... 18,479 28,046 24,458 70,983
Total......................................... $154,075 $303,747 $624,637 $1,082,459
Loans with fixed-rate......................... $ 44,126 $242,246 $414,621 $ 700,993
Loans with floating-rate...................... 109,949 61,501 210,016 381,466
Total......................................... $154,075 $303,747 $624,637 $1,082,459
Percent composition of maturity............... 14.2% 28.1% 57.7% 100.0%
Fixed-rate loans as a percentage of total
loans....................................... 64.8%
Floating-rate loans as a percentage of total
loans....................................... 35.2%
</TABLE>
The loan maturity information is based upon original loan terms and is not
adjusted for principal paydowns and "rollovers." In the ordinary course of
business, loans maturing within one year may be renewed, in whole or in part, as
to principal amount at interest rates prevailing at the date of renewal.
At December 31, 1999, 64.8% of total loans were fixed-rate which was
comparable with the prior year. The stability in the fixed-rate percentage
between years reflects continued customer preference for fixed-rate loans in
this overall low interest rate environment. Also, a good portion of the
commercial real estate loan growth has occurred in the five year fixed-rate
area. For additional information regarding interest rate sensitivity, see
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations -- Interest Rate Sensitivity."
COMMERCIAL
This category includes credit extensions to commercial and industrial
borrowers. These credits are typically secured by business assets, including
accounts receivable, inventory and equipment. Advance rates on accounts are
limited to 80% of eligible receivables and 50% of raw materials and finished
goods inventory. Overall balance sheet strength and profitability are considered
when analyzing these credits, with special
9
<PAGE> 11
attention given to current and historical cash flow coverage. Policy permits
flexibility in determining acceptable coverage ratios, but they seldom fall
below 1.1 to 1. Personal guarantees are frequently required, however, as the
strength of the borrower increases our ability to obtain personal guarantees
decreases. In addition to economic risk, this category is subject to risk of
weak borrower management and industry risk, all of which are considered at
underwriting.
COMMERCIAL LOANS SECURED BY REAL ESTATE
This category includes various types of loans, including acquisition and
construction of investment property, owner-occupied and operating property.
Maximum term, minimum cash flow coverage, leasing requirements, maximum
amortization and maximum loan to value ratios are controlled by Credit Policy
and follow industry guidelines and norms and regulatory limitations. Personal
guarantees are always required during the construction phase on construction
credits and are frequently obtained on mid to smaller commercial real estate
loans. In addition to economic risk, this category is subject to geographic and
portfolio concentration risk, which are monitored and considered at
underwriting.
REAL ESTATE -- MORTGAGE
This category includes mortgages that are secured by residential property.
Underwriting of loans within this category is pursuant to Freddie Mac
underwriting guidelines, with the exception of CRA loans, which have more
liberal standards. The major risk in this category is that a significant
downward economic trend would increase unemployment and cause payment defaults.
CONSUMER
This category includes consumer installment loans and revolving credit
plans. Underwriting standards identify undesirable loans, repayment terms and
debt coverage ratios. Loans with debt to income coverage of 45% or less are
considered satisfactory. Loans between 46% and 50% require special approval, and
loans over 50% are exceptions to policy. The major risk in this category is
significant economic downturn.
DEPOSITS
The following table sets forth the average balance of the Company's
deposits and the average rates paid thereon for the past three calendar years:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ---- ---------- ---- ---------- ----
(IN THOUSANDS, EXCEPT RATES)
<S> <C> <C> <C> <C> <C> <C>
Demand -- non-interest bearing..... $ 170,891 --% $ 159,515 --% $ 143,767 --%
Demand -- interest bearing......... 93,399 0.99 89,890 0.99 90,179 0.99
Savings............................ 171,783 1.63 171,769 1.52 185,959 1.69
Money markets...................... 182,395 3.46 167,758 3.60 153,345 3.71
Other time......................... 619,392 5.03 581,351 5.39 580,720 5.66
Total deposits..................... $1,237,860 3.86% $1,170,283 4.05% $1,153,970 4.21%
</TABLE>
Total deposits increased by $55 million or 4.6% in 1999 due to the
acquisition of the deposits associated with the acquired First Western Branches.
Deposits were negatively impacted by the sale of a $6.0 million marginally
profitable branch office and runoff of certificates of deposit. The growth in
demand deposits over each of the past two years reflects the success of new
business generated in conjunction with the increased commercial lending
activity.
10
<PAGE> 12
The following table indicates the maturities and amounts of certificates of
deposit issued in denominations of $100,000 or more as of December 31, 1999:
MATURING IN:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Three months or less........................................ $77,541
Over three through six months............................... 4,416
Over six through twelve months.............................. 5,764
Over twelve months.......................................... 3,200
Total....................................................... $90,921
</TABLE>
ITEM 2. PROPERTIES
The principal offices of the Company and U.S. Bank occupy a five-story
building at the corner of Main and Franklin Streets in Johnstown plus several
floors of the building adjacent thereto. The Company occupies the main office
and its subsidiary entities have 32 other locations which are owned in fee.
Sixteen additional locations are leased with terms expiring from March 31, 2000,
to November 30, 2009.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to a number of asserted and unasserted potential
legal claims encountered in the normal course of business. In the opinion of
both management and legal counsel, there is no present basis to conclude that
the resolution of these claims will have a material adverse effect on the
Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Company to its shareholders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
11
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
As of January 31, 2000, the Company had 5,321 shareholders of its Common
Stock. Other information required by this section is presented on pages 58 and
59.
COMMON STOCK
USBANCORP's Common Stock is traded on the NASDAQ National Market System
under the symbol "UBAN." The following table sets forth the high and low closing
prices and the cash dividends declared per share for the periods indicated:
<TABLE>
<CAPTION>
CLOSING PRICES
---------------- CASH DIVIDENDS
HIGH LOW DECLARED
------ ------ --------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
$21.88 $14.63 $0.14
FIRST QUARTER...........................................
17.06 14.44 0.15
SECOND QUARTER..........................................
16.00 13.19 0.15
THIRD QUARTER...........................................
13.75 11.25 0.15
FOURTH QUARTER..........................................
Year ended December 31, 1998:
$25.71 $20.50 $0.12
First Quarter...........................................
27.50 25.77 0.14
Second Quarter..........................................
26.67 19.00 0.14
Third Quarter...........................................
21.00 14.38 0.20
Fourth Quarter..........................................
</TABLE>
12
<PAGE> 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED TEN-YEAR CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF INCOME STATEMENT DATA:
Total interest income.............. $ 165,188 $ 158,958 $ 154,788 $ 137,333 $ 129,715
Total interest expense............. 99,504 93,728 87,929 76,195 73,568
---------- ---------- ---------- ---------- ----------
Net interest income................ 65,684 65,230 66,859 61,138 56,147
Provision for loan losses........ 1,900 600 158 90 285
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses.................. 63,784 64,630 66,701 61,048 55,862
Total non-interest income.......... 24,374 23,689 20,203 18,689 16,543
Total non-interest expense......... 60,815 59,520 54,104 52,474 50,557
---------- ---------- ---------- ---------- ----------
Income before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle........................ 27,343 28,799 32,800 27,263 21,848
Provision for income taxes....... 6,922 7,655 9,303 7,244 6,045
---------- ---------- ---------- ---------- ----------
Income before extraordinary item,
cumulative effect of change in
accounting principle............. 20,421 21,144 23,497 20,019 15,803
Extraordinary item -- utilization
of tax loss carry forward...... -- -- -- -- --
Cumulative effect of change in
accounting principle........... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income......................... $ 20,421 $ 21,144 $ 23,497 $ 20,019 $ 15,803
========== ========== ========== ========== ==========
Net income applicable to common
stock............................ $ 20,421 $ 21,144 $ 23,497 $ 20,019 $ 15,803
========== ========== ========== ========== ==========
PER COMMON SHARE DATA:(1)
Basic earnings per share........... $ 1.53 $ 1.51 $ 1.56 $ 1.28 $ 0.96
Diluted earnings per share......... 1.52 1.48 1.54 1.28 0.96
Cash dividends declared............ 0.59 0.60 0.53 0.46 0.35
Book value at period end........... 8.46 10.48 10.77 9.97 9.45
========== ========== ========== ========== ==========
BALANCE SHEET AND OTHER DATA:
Total assets....................... $2,467,479 $2,377,081 $2,239,110 $2,087,112 $1,885,372
Loans and loans held for sale, net
of unearned income............... 1,095,804 1,066,321 989,575 939,726 834,634
Allowance for loan losses.......... 10,350 10,725 12,113 13,329 14,914
Investment securities available for
sale............................. 1,187,335 661,491 580,115 455,890 427,112
Investment securities held to
maturity......................... -- 508,142 536,608 546,318 463,951
Deposits........................... 1,230,941 1,176,291 1,139,527 1,138,738 1,177,858
Total borrowings................... 1,099,842 1,026,570 913,056 770,102 534,182
Stockholders' equity............... 112,557 141,670 158,180 151,917 150,492
Full-time equivalent employees..... 745 762 765 759 742
========== ========== ========== ========== ==========
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF INCOME STATEMENT DATA:
Total interest income.............. $ 102,811 $ 85,735 $ 82,790 $ 66,446 $ 70,469
Total interest expense............. 46,993 36,250 38,349 33,538 38,763
---------- ---------- ---------- -------- --------
Net interest income................ 55,818 49,485 44,441 32,908 31,706
Provision for loan losses........ (2,765) 2,400 2,216 900 915
---------- ---------- ---------- -------- --------
Net interest income after provision
for loan losses.................. 58,583 47,085 42,225 32,008 30,791
Total non-interest income.......... 8,187 10,150 8,346 6,035 5,340
Total non-interest expense......... 49,519 40,715 36,248 28,862 27,198
---------- ---------- ---------- -------- --------
Income before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle........................ 17,251 16,520 14,323 9,181 8,933
Provision for income taxes....... 5,931 5,484 5,440 2,873 2,745
---------- ---------- ---------- -------- --------
Income before extraordinary item,
cumulative effect of change in
accounting principle............. 11,320 11,036 8,883 6,308 6,188
Extraordinary item -- utilization
of tax loss carry forward...... -- -- -- 1,004 1,474
Cumulative effect of change in
accounting principle........... -- 1,452 -- -- --
---------- ---------- ---------- -------- --------
Net income......................... $ 11,320 $ 12,488 $ 8,883 $ 7,312 $ 7,662
========== ========== ========== ======== ========
Net income applicable to common
stock............................ $ 11,320 $ 12,385 $ 7,710 $ 6,139 $ 6,489
========== ========== ========== ======== ========
PER COMMON SHARE DATA:(1)
Basic earnings per share........... $ 0.73 $ 0.93 $ 0.89 $ 0.80 $ 0.85
Diluted earnings per share......... 0.73 0.91 0.84 0.76 0.80
Cash dividends declared............ 0.32 0.29 0.25 0.18 0.05
Book value at period end........... 8.19 8.22 7.69 7.24 6.62
========== ========== ========== ======== ========
BALANCE SHEET AND OTHER DATA:
Total assets....................... $1,788,890 $1,241,521 $1,139,855 $784,036 $774,403
Loans and loans held for sale, net
of unearned income............... 868,004 727,186 648,915 430,151 445,814
Allowance for loan losses.......... 15,590 15,260 13,752 13,003 12,470
Investment securities available for
sale............................. 259,462 428,712 366,888 -- --
Investment securities held to
maturity......................... 524,638 -- -- 289,772 235,722
Deposits........................... 1,196,246 1,048,866 997,591 676,698 674,176
Total borrowings................... 432,735 60,322 48,461 27,564 26,573
Stockholders' equity............... 137,136 116,615 82,971 70,023 65,050
Full-time equivalent employees..... 780 665 644 523 535
========== ========== ========== ======== ========
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
Return on average total equity..... 15.48% 14.13% 15.00% 13.36% 11.03%
Return on average assets........... 0.83 0.93 1.09 1.03 0.87
Loans and loans held for sale, net
of unearned income, as a percent
of deposits, at period end....... 89.02 87.09 86.84 82.52 70.86
Ratio of average total equity to
average assets................... 5.39 6.58 7.28 7.69 7.85
Common stock cash dividends as a
percent of net income applicable
to common stock.................. 38.51 41.00 34.00 35.28 36.43
Common and preferred stock cash
dividends as a percent of net
income........................... 38.51 41.00 34.00 35.28 36.43
Interest rate spread............... 2.59 2.58 2.97 3.06 2.94
Net interest margin................ 2.96 3.17 3.43 3.52 3.45
Allowance for loan losses as a
percentage of loans and loans
held for sale, net of unearned
income, at period end............ 0.94 1.01 1.22 1.42 1.79
Non-performing assets as a
percentage of loans and loans
held for sale and other real
estate owned, at period end...... 1.21 0.77 0.89 0.92 1.13
Net charge-offs as a percentage of
average loans and loans held for
sale............................. 0.21 0.19 0.14 0.20 0.08
Ratio of earnings to fixed charges
and preferred dividends:(2)
Excluding interest on deposits... 1.47X 1.54x 1.72x 1.79x 1.77x
Including interest on deposits... 1.27 1.31 1.37 1.36 1.30
One year GAP ratio, at period
end.............................. 0.59 1.03 0.88 0.79 0.86
========== ========== ========== ========== ==========
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
Return on average total equity..... 8.92% 11.46% 11.41% 10.88% 12.38%
Return on average assets........... 0.75 1.03 0.85 0.96 1.01
Loans and loans held for sale, net
of unearned income, as a percent
of deposits, at period end....... 72.56 69.33 65.05 63.57 66.13
Ratio of average total equity to
average assets................... 8.39 8.96 7.48 8.85 8.18
Common stock cash dividends as a
percent of net income applicable
to common stock.................. 44.57 32.28 28.16 22.94 5.90
Common and preferred stock cash
dividends as a percent of net
income........................... 44.57 32.84 37.64 35.30 20.31
Interest rate spread............... 3.47 3.72 3.93 3.69 3.46
Net interest margin................ 4.03 4.34 4.58 4.69 4.56
Allowance for loan losses as a
percentage of loans and loans
held for sale, net of unearned
income, at period end............ 1.80 2.10 2.12 3.02 2.80
Non-performing assets as a
percentage of loans and loans
held for sale and other real
estate owned, at period end...... 0.91 0.89 1.58 1.10 0.87
Net charge-offs as a percentage of
average loans and loans held for
sale............................. 0.04 0.13 0.58 0.08 0.17
Ratio of earnings to fixed charges
and preferred dividends:(2)
Excluding interest on deposits... 2.34x 5.26x 4.05x 4.54x 3.87x
Including interest on deposits... 1.37 1.45 1.36 1.26 1.22
One year GAP ratio, at period
end.............................. 0.79 1.10 1.14 1.06 0.97
========== ========== ========== ======== ========
</TABLE>
- ---------------
(1) All per share and share data have been adjusted to reflect a 3 for 1 stock
split in the form of a 200% stock dividend which was distributed on July 31,
1998, to shareholders of record on July 16, 1998.
(2) The ratio of earnings to fixed charges and preferred dividends is computed
by dividing the sum of income before taxes, fixed charges, and preferred
dividends by the sum of fixed charges and preferred dividends. Fixed charges
represent interest expense and are shown as both excluding and including
interest on deposits.
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ("M. D. & A.")
The following discussion and analysis of financial condition and results of
operations of USBANCORP should be read in conjunction with the consolidated
financial statements of USBANCORP, including the related notes thereto, included
elsewhere herein.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
PERFORMANCE OVERVIEW. . .The Company's net income for 1999 was $20.4
million or $1.52 on a diluted per share basis compared to net income of $21.1
million or $1.48 per diluted share for 1998 and net income of $23.5 million or
$1.54 per diluted share for 1997. When 1999 is compared to 1998, the Company's
diluted earnings per share increased by $0.04 or 2.7% while net income dropped
by $723,000 or 3.4%. When 1998 is compared to 1997, the Company's diluted
earnings per share decreased by $0.06 or 3.9% while net income dropped by $2.4
million or 10.0%. The Company's return on equity increased to 15.48% for 1999
compared to 14.13% for 1998 and 15.0% for 1997.
Growth in total revenue, which includes both net interest income and
non-interest income, was a key factor that contributed positively to the
Company's financial performance in 1999. Specifically, total non-interest income
increased by $685,000 or 2.9% while net interest income increased by $454,000 or
0.7% when compared to 1998. This $1.1 million increase in total revenue was
offset by higher non-interest expense and an increase in the provision for loan
losses. Total non-interest expense was $1.3 million or 2.2% higher in 1999 while
the provision for loan losses increased by $1.3 million. Even though net income
decreased in 1999, diluted earnings per share and return on equity increased due
to the success of the Company's common stock repurchase program. The Company
used its treasury stock repurchase program throughout 1998 and the first quarter
of 1999 to actively manage its capital and reduce both total equity and common
shares outstanding. As a result of this program, there were 806,000 fewer
average diluted shares outstanding in 1999 compared to 1998. The Company's
equity base was also reduced by a drop in other comprehensive income due to a
decline in value of the Company's available for sale securities portfolio.
Compression in the Company's net interest margin and a higher level of
non-interest expense offset the benefit of an increased amount of non-interest
income to cause the drop in earnings in 1998 compared to 1997. Specifically,
total non-interest income increased by $3.5 million or 17.3% while net interest
income declined by $1.6 million or 2.4% from the prior year. This net $1.9
million increase in total revenue was more than offset by higher non-interest
expense and an increase in the provision for loan losses. Total non-interest
expense was $5.4 million or 10.0% higher in 1998 while the provision for loan
losses increased by $442,000. The Company's earnings per share, however, were
enhanced by the repurchase of its common stock because there were one million
fewer average diluted shares outstanding in 1998.
The following table summarizes some of the Company's key performance
indicators for each of the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA AND RATIOS)
<S> <C> <C> <C>
Net income.................................................. $20,421 $21,144 $23,497
Diluted earnings per share.................................. 1.52 1.48 1.54
Return on average equity.................................... 15.48% 14.13% 15.00%
Return on average assets.................................... 0.83 0.93 1.09
Average diluted common shares outstanding................... 13,451 14,258 15,274
</TABLE>
NET INTEREST INCOME AND MARGIN. . . The Company's net interest income
represents the amount by which interest income on earning assets exceeds
interest paid on interest bearing liabilities. Net interest income is a primary
source of the Company's earnings; it is affected by interest rate fluctuations
as well as changes in the amount and mix of earning assets and interest bearing
liabilities. It is the Company's
15
<PAGE> 17
philosophy to strive to optimize net interest margin performance in varying
interest rate environments. The following table summarizes the Company's net
interest income performance for each of the past three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
Interest income............................................ $165,188 $158,958 $154,788
Interest expense........................................... 99,504 93,728 87,929
-------- -------- --------
Net interest income........................................ 65,684 65,230 66,859
Tax-equivalent adjustment.................................. 3,079 2,876 2,939
-------- -------- --------
Net tax-equivalent interest income......................... $ 68,763 $ 68,106 $ 69,798
Net interest margin........................................ 2.96% 3.17% 3.43%
</TABLE>
1999 NET INTEREST PERFORMANCE OVERVIEW. . . USBANCORP's net interest income
on a tax-equivalent basis increased by $657,000 or 1.0% due to growth in earning
assets. Total average earning assets were $172 million higher in 1999 due to a
$44 million or 4.3% increase in total loans and a $128 million or 11.5% increase
in investment securities. The Company was able to achieve solid loan growth in
commercial loans, commercial mortgage loans, and home equity loans throughout
1999. The higher level of investment securities resulted in part from the use of
funds provided with the First Western Branches Acquisition which closed in the
first quarter of 1999. As part of this acquisition, the Company acquired
approximately $91 million of deposits and $10 million of consumer loans.
The income benefit from this growth in earning assets was partially offset
by a 21 basis point decline in the net interest margin to 2.96%. The drop in the
net interest margin reflects a 29 basis point decline in the earning asset yield
due primarily to accelerated prepayments in both the securities and loan
portfolios in the first half of 1999 and the reinvestment of these cash flows in
lower yielding assets. Prepayments slowed considerably in the second half of the
year. The decline in the earning asset yield more than offset a 14 basis point
drop in the cost of funds due to lower deposit and borrowing costs.
The overall growth in the earning asset base was one strategy used by the
Company to leverage its capital. The maximum amount of leveraging the Company
can perform is controlled by internal policy requirements to maintain a minimum
asset leverage ratio of no less than 6.0% (see further discussion under Capital
Resources) and to limit net interest income variability to P7.5% and net income
variability to P15% over a twelve month period. (See further discussion under
Interest Rate Sensitivity).
COMPONENT CHANGES IN NET INTEREST INCOME: 1999 VERSUS 1998. . . Regarding
the separate components of net interest income, the Company's total
tax-equivalent interest income for 1999 increased by $6.4 million or 4.0% when
compared to 1998. This increase was due primarily to the previously mentioned
$172 million or 8.1% increase in total average earning assets which caused
interest income to rise by $12.6 million. This positive factor was partially
offset by a 29 basis point drop in the earning asset yield to 7.27% which caused
a $6.2 million reduction in interest income. Within the earning asset base, the
yield on total investment securities decreased by 16 basis points to 6.50% while
the yield on the total loan portfolio declined by 39 basis points to 8.12%.
Accelerated prepayments of mortgage related assets and the reinvestment of this
cash into lower yielding assets was the primary factor causing the compression
in the earning asset yield.
Continued growth of the loan portfolio was an important component of the
earning asset growth. The Company's loan-to-deposit ratio averaged 86.9% for
1999. This loan growth resulted from the Company's ability to take market share
from its competitors through strategies which emphasize convenient customer
service, niche products and hard work. Other factors contributing to the loan
growth were a stable economic environment and increased loan volumes from two
loan production offices in the higher growth markets of Westmoreland and Centre
Counties.
The Company's total interest expense for 1999 increased by $5.8 million or
6.2% when compared to 1998. This higher interest expense was due primarily to a
$184 million increase in average interest bearing liabilities
16
<PAGE> 18
which caused interest expense to rise by $10.6 million. The growth in interest
bearing liabilities included a $56 million increase in interest bearing deposits
due largely to the deposits acquired with the First Western Branches Acquisition
net of certificate of deposit run-off and the sale of one small branch office.
The remainder of the interest bearing liability increase occurred in FHLB
advances which were used to help fund the previously mentioned earning asset
growth. A reduction in the cost of funds caused a $4.8 million decrease in
interest expense. Short-term borrowings and FHLB advances had an average cost of
5.44% in 1999 which was 19 basis points lower than their cost in the prior year
but 158 basis points greater than the average cost of deposits which amounted to
3.86%. The Company was able to reduce its cost of deposits by 19 basis points
due primarily to lower costs for certificates of deposit. Overall, the Company's
total cost of funds dropped by 14 basis points to 4.69% as the pricing declines
for both deposits and borrowings were partially offset by a greater use of
borrowings to fund the earning asset base.
It is recognized that interest rate risk does exist from this use of
borrowed funds to leverage the balance sheet. To neutralize a portion of this
risk, the Company has executed a total of $390 million of off-balance sheet
hedging transactions which help fix the variable funding costs associated with
the use of short-term borrowings to fund earning assets. (See further discussion
under Note #21.) The Company also has asset liability policy parameters which
limit the maximum amount of borrowings to 40% of total assets. For 1999, the
level of short-term borrowed funds and FHLB advances to total assets averaged
41.3%. The Company plans to use cash flow from mortgage-backed securities to pay
down borrowings to bring the ratio back within policy guidelines during the next
several quarters. The Company also plans to be more aggressive in deposit
pricing in 2000 in order to help raise deposits to fund anticipated loan growth
and to paydown borrowings. Overall, the Company expects to experience net
interest margin pressure in 2000 due to the anticipated increases in interest
rates and the lengthening of the durations of the securities portfolio which
will further slow cash flows.
1998 NET INTEREST PERFORMANCE OVERVIEW. . . USBANCORP's net interest income
on a tax-equivalent basis decreased by $1.7 million or 2.4% due to the negative
impact of a 26 basis point decline in the net interest margin to 3.17%. The drop
in the net interest margin reflects a 22 basis point decline in the earning
asset yield due primarily to accelerated mortgage prepayments in both the
securities and loan portfolios resulting from the flat treasury yield curve and
the reinvestment of these cash flows in lower yielding assets. The cost of funds
increased by two basis points due in part to the interest cost associated with
the $34.5 million of guaranteed junior subordinated deferrable interest
debentures issued on April 30, 1998, and an increased use of borrowings to fund
earning asset growth. This margin compression offset the benefits resulting from
growth in the earning asset base. Total average earning assets were $117 million
higher in 1998 due primarily to a $59 million or 6.1% increase in total loans
and a $59 million or 5.6% increase in investment securities.
COMPONENT CHANGES IN NET INTEREST INCOME: 1998 VERSUS 1997. . . Regarding
the separate components of net interest income, the Company's total interest
income for 1998 increased by $4.2 million or 2.7% when compared to 1997. This
increase was due primarily to a $117 million or 5.8% increase in total average
earning assets which caused interest income to rise by $7.8 million. This
positive factor was partially offset by a 22 basis point drop in the earning
asset yield to 7.56% that caused a $3.7 million reduction in interest income.
Within the earning asset base, the yield on total investment securities
decreased by 29 basis points to 6.65% as accelerated mortgage prepayment speeds
caused increased amortization expense on mortgage-backed securities which had
been purchased at a premium. The yield on the total loan portfolio declined by
15 basis points to 8.51% due to the downward repricing of floating rate assets
and the reinvestment of cash received on higher yielding prepaying assets into
loans with lower interest rates. These heightened prepayments reflect increased
customer refinancing activity due to drops in intermediate- and long-term
interest rates on the treasury yield curve in 1998. Note that the decline in the
loan portfolio yield was not as significant as the drop in the investment
securities portfolio yield due partially to the collection of prepayment
penalties on certain commercial mortgage loan pay-offs and a favorable shift in
the loan portfolio mix away from lower yielding indirect auto loans.
The Company's total interest expense for 1998 increased by $5.8 million or
6.6% when compared to 1997. This higher interest expense was due primarily to a
$112 million increase in average interest bearing liabilities.
17
<PAGE> 19
The growth in interest bearing liabilities included the issuance of $34.5
million of 8.45% guaranteed junior subordinated deferrable interest debentures
which increased interest expense by $2 million in 1998. The proceeds from this
retail offering of trust preferred securities provided the Company with the
necessary capital to continue to execute an active treasury stock repurchase
program and complete the acquisition of two National City Branch Offices in
Allegheny County with $27 million in deposits. The remainder of the interest
bearing liability increase occurred in short-term borrowings and FHLB advances
which were used to fund the previously mentioned earning asset growth. For 1998,
the Company's total level of short-term borrowed funds and FHLB advances
averaged $895 million or 39.4% of total assets compared to an average of $806
million or 37.4% of total assets for 1997. This greater dependence on borrowings
to fund the earning asset base, along with the interest costs associated with
the guaranteed junior subordinated deferrable interest debentures, were the
factors responsible for the two basis point increase in the total cost of
interest bearing liabilities to 4.83% in 1998. This increase in the total cost
of funds occurred despite a 16 basis point drop in the cost of interest bearing
deposits to 4.05% as management was able to reprice all major deposit categories
downward in 1998.
The table that follows provides an analysis of net interest income on a
tax-equivalent basis setting forth (i) average assets, liabilities and
stockholders' equity, (ii) interest income earned on interest earning assets and
interest expense paid on interest bearing liabilities, (iii) average yields
earned on interest earning assets and average rates paid on interest bearing
liabilities, (iv) USBANCORP's interest rate spread (the difference between the
average yield earned on interest earning assets and the average rate paid on
interest bearing liabilities), and (v) USBANCORP's net interest margin (net
interest income as a percentage of average total interest earning assets). For
purposes of this table, loan balances include non-accrual loans and interest
income on loans includes loan fees or amortization of such fees which have been
deferred, as well as, interest recorded on non-accrual loans as cash is
received. Additionally, a tax rate of approximately 35% is used to compute tax
equivalent yields.
18
<PAGE> 20
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------
1999 1998 1997
-------- -------- --------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans, net of unearned
income..................... $1,063,409 $ 87,544 8.12% $1,019,215 $87,783 8.51% $ 960,673 $84,309 8.66%
Deposits with banks.......... 4,115 121 2.91 3,874 120 3.07 3,792 190 4.97
Federal funds sold and
securities purchased under
agreements to resell....... -- -- -- 41 2 5.29 36 2 5.20
Investment securities:
Available for sale......... 736,221 47,113 6.40 604,872 38,890 6.43 479,383 32,806 6.84
Held to maturity........... 502,239 33,489 6.67 505,861 35,039 6.93 573,350 40,420 7.05
---------- -------- ---- ---------- ------- ---- ---------- ------- ----
Total investment
securities................. 1,238,460 80,602 6.50 1,110,733 73,929 6.66 1,052,733 73,226 6.95
---------- -------- ---- ---------- ------- ---- ---------- ------- ----
TOTAL INTEREST EARNING
ASSETS/INTEREST INCOME....... 2,305,984 168,267 7.27 2,133,863 161,834 7.56 2,017,234 157,727 7.78
---------- -------- ---- ---------- ------- ---- ---------- ------- ----
Non-interest earning assets:
Cash and due from banks...... 38,585 34,009 32,743
Premises and equipment....... 18,835 17,946 17,952
Other assets................. 96,675.... 99,452 97,514
Allowance for loan losses.... (10,998) (11,715) (13,057)
---------- ---------- ----------
TOTAL ASSETS................... $2,449,081 $2,273,555 $2,152,386
========== ========== ==========
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand.... $ 93,399 $ 925 0.99% $ 89,890 $ 892 0.99% $ 90,179 $ 895 0.99%
Savings.................... 171,783 2,802 1.63 171,769 2,615 1.52 185,959 3,140 1.69
Money market............... 182,395 6,305 3.46 167,758 6,040 3.60 153,345 5,688 3.71
Other time................. 619,392 31,118 5.03 581,351 31,344 5.39 580,720 32,849 5.66
---------- -------- ---- ---------- ------- ---- ---------- ------- ----
Total interest bearing
deposits................. 1,066,969 41,150 3.86 1,010,768 40,891 4.05 1,010,203 42,572 4.21
Federal funds purchased,
securities sold under
agreements to repurchase, and
other short-term
borrowings................... 215,613 11,037 5.12 189,324 9,906 5.23 156,499 8,183 5.23
Advances from Federal Home Loan
Bank......................... 795,720 43,946 5.52 705,507 40,483 5.74 649,235 36,648 5.64
Guaranteed junior subordinated
deferrable interest
debentures................... 34,500 2,960 8.58 23,096 1,981 8.58 -- -- --
Long-term debt................. 8,336 411 4.93 8,788 467 5.31 9,329 526 5.64
---------- -------- ---- ---------- ------- ---- ---------- ------- ----
TOTAL INTEREST BEARING
LIABILITIES/INTEREST
EXPENSE...................... 2,121,138 99,504 4.69 1,937,483 93,728 4.83 1,825,266 87,929 4.81
---------- -------- ---- ---------- ------- ---- ---------- ------- ----
Non-interest bearing
liabilities:
Demand deposits.............. 170,891 159,515 143,767
Other liabilities............ 25,125 26,893 26,722
Stockholders' equity......... 131,927 149,664 156,631
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY......... $2,449,081 $2,273,555 $2,152,386
========== ========== ==========
Interest rate spread........... 2.59 2.73 2.97
Net interest income/net
interest margin.............. 68,763 2.96% 68,106 3.17% 69,798 3.43%
Tax-equivalent adjustment...... (3,079) (2,876) (2,939)
-------- ------- -------
Net interest income............ $ 65,684 $65,230 $66,859
======== ======= =======
</TABLE>
19
<PAGE> 21
The average balance and yield on taxable securities was $1,075 million and
6.49%, $975 million and 6.61%, and $916 million and 6.94% for 1999, 1998, and
1997, respectively. The average balance and tax-equivalent yield on tax-exempt
securities was $163 million and 6.57%, $133 million and 6.94%, and $132 million
and 6.92% for 1999, 1998, and 1997, respectively.
Net interest income may also be analyzed by segregating the volume and rate
components of interest income and interest expense. The table below sets forth
an analysis of volume and rate changes in net interest income on a
tax-equivalent basis. For purposes of this table, changes in interest income and
interest expense are allocated to volume and rate categories based upon the
respective percentage changes in average balances and average rates. Changes in
net interest income that could not be specifically identified as either a rate
or volume change were allocated proportionately to changes in volume and changes
in rate.
<TABLE>
<CAPTION>
1999 VS. 1998 1998 VS. 1997
---------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN:
---------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans, net of unearned income.... $ 4,200 $(4,439) $ (239) $4,854 $(1,380) $ 3,474
Deposits with banks.............. 6 (5) 1 4 (74) (70)
Federal funds sold and securities
purchased under agreements to
resell......................... (1) (1) (2) -- -- --
Investment securities............ 8,435 (1,762) 6,673 2,900 (2,197) 703
------- ------- ------ ------ ------- -------
TOTAL INTEREST INCOME............ 12,640 (6,207) 6,433 7,758 (3,651) 4,107
------- ------- ------ ------ ------- -------
INTEREST PAID ON:
Interest bearing demand
deposits....................... 33 -- 33 (3) -- (3)
Savings deposits................. -- 187 187 (226) (299) (525)
Money market..................... 478 (213) 265 514 (162) 352
Other time deposits.............. 2,919 (3,145) (226) 35 (1,540) (1,505)
Federal funds purchased,
securities sold under
agreements to repurchase, and
other short-term borrowings.... 1,271 (140) 1,131 1,723 -- 1,723
Advances from Federal Home Loan
Bank........................... 4,945 (1,482) 3,463 3,184 651 3,835
Guaranteed junior subordinated
deferrable interest
debentures..................... 979 -- 979 1,981 -- 1,981
Long-term debt................... (23) (33) (56) (91) 32 (59)
------- ------- ------ ------ ------- -------
TOTAL INTEREST EXPENSE........... 10,602 (4,826) 5,776 7,117 (1,318) 5,799
------- ------- ------ ------ ------- -------
CHANGE IN NET INTEREST INCOME.... $ 2,038 $(1,381) $ 657 $ 641 $(2,333) $(1,692)
======= ======= ====== ====== ======= =======
</TABLE>
LOAN QUALITY. . .USBANCORP's written lending policies require underwriting, loan
documentation, and credit analysis standards to be met prior to funding any
loan. After the loan has been approved and funded, continued periodic credit
review is required. Credit reviews are mandatory for all commercial loans and
for all commercial mortgages in excess of $500,000 within an 18-month period. In
addition, due to the secured nature of residential mortgages and the smaller
balances of individual installment loans, sampling techniques
20
<PAGE> 22
are used on a continuing basis for credit reviews in these loan areas. The
following table sets forth information concerning USBANCORP's loan delinquency
and other non-performing assets. At all dates presented, the Company had no
troubled debt restructurings which involve forgiving a portion of interest or
principal on any loans or making loans at a rate materially less than that of
market rates:
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Total loan delinquency (past due 30 to 89 days)............. $ 9,931 $15,427 $19,890
Total non-accrual loans..................................... 4,928 5,206 6,450
Total non-performing assets(1).............................. 13,359 8,236 8,858
Loan delinquency as a percentage of total loans and loans
held for sale, net of unearned income..................... 0.91% 1.45% 2.01%
Non-accrual loans as a percentage of total loans and loans
held for sale, net of unearned income..................... 0.45 0.49 0.65
Non-performing assets as a percentage of total loans and
loans held for sale, net of unearned income, and other
real estate owned......................................... 1.21 0.77 0.89
</TABLE>
- ---------------
(1) Non-performing assets are comprised of (i) loans that are on a non-accrual
basis, (ii) loans that are contractually past due 90 days or more as to
interest and principal payments of which some are insured for credit loss,
and (iii) other real estate owned. All loans, except for loans that are
insured for credit loss, are placed on non-accrual status immediately upon
becoming 90 days past due in either principal or interest.
Between December 31, 1998, and December 31, 1999, total loan delinquency
declined by $5.5 million causing the delinquency ratio to drop to 0.91%. Total
non-accrual loans were relatively consistent between years. The $5.1 million
increase in non-performing assets is due entirely to a $6 million construction
loan on a completed assisted living facility which the Company took possession
of in the fourth quarter of 1999. The Company recorded a $500,000 charge-off on
this property when it was moved into other real estate owned.
Between December 31, 1997, and December 31, 1998, each of the key asset
quality indicators demonstrated improvement. Total loan delinquency declined by
$4.5 million causing the delinquency ratio to drop to 1.45%. Total
non-performing assets decreased by $622,000 since year-end 1997 causing the non-
performing assets to total loans ratio to drop to 0.77%. The overall improvement
in asset quality resulted from enhanced collection efforts on residential
mortgage loans and continued low levels of non-performing commercial loans.
These favorable asset quality trends supported the Company's ability to fund the
loan loss provision at a level lower than the net-charge off experience in 1998.
ALLOWANCE AND PROVISION FOR LOAN LOSSES. . .As described in more detail in
the accounting policy footnote, the Company uses a comprehensive methodology and
procedural discipline to maintain an allowance for loan losses to absorb
inherent losses in the loan portfolio. The allowance can be summarized into
three elements; 1) reserves established on specifically identified problem
loans, 2) formula driven general reserves established for loan categories based
upon historical loss experience and other qualitative factors which include
delinquency and non-performing loan trends, concentrations of credit, trends in
loan volume, experience and depth of management, examination and audit results,
effects of any changes in lending policies, and trends in policy exceptions, and
3) a general unallocated reserve which provides conservative positioning in the
event of variance from our assessment of the previously listed qualitative
factors, provides protection against credit risks resulting from other inherent
risk factors contained in the bank's loan portfolio, and recognizes the model
and estimation risk associated with the specific and formula driven allowances.
Note that the qualitative factors used in the formula driven general reserves
are evaluated
21
<PAGE> 23
quarterly (and revised if necessary) by the Company's management to establish
allocations which accommodate each of the listed risk factors. The following
table sets forth changes in the allowance for loan losses and certain ratios for
the periods ended:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year:.............. $ 10,725 $ 12,113 $ 13,329 $ 14,914 $ 15,590
---------- ---------- -------- -------- --------
Reduction due to disposition of business
line..................................... -- -- -- -- (342)
---------- ---------- -------- -------- --------
Charge-offs:
Commercial............................. 1,802 899 1,040 1,705 576
Real estate-mortgage................... 625 359 202 156 135
Consumer............................... 576 1,260 1,255 746 589
---------- ---------- -------- -------- --------
Total charge-offs...................... 3,003 2,518 2,497 2,607 1,300
---------- ---------- -------- -------- --------
Recoveries:
Commercial............................. 295 113 529 527 183
Real estate-mortgage................... 199 132 262 108 41
Consumer............................... 234 285 332 297 457
---------- ---------- -------- -------- --------
Total recoveries....................... 728 530 1,123 932 681
---------- ---------- -------- -------- --------
Net charge-offs............................ 2,275 1,988 1,374 1,675 619
Provision for loan losses.................. 1,900 600 158 90 285
---------- ---------- -------- -------- --------
Balance at end of year..................... $ 10,350 $ 10,725 $ 12,113 $ 13,329 $ 14,914
========== ========== ======== ======== ========
Loans and loans held for sale, net of
unearned income:
Average for the year..................... $1,063,409 $1,019,215 $960,673 $857,921 $823,807
At December 31........................... 1,095,804 1,066,321 989,575 939,726 834,634
As a percent of average loans and loans
held for sale:
Net charge-offs.......................... 0.21% 0.19% 0.14% 0.20% 0.08%
Provision for loan losses................ 0.18 0.06 0.02 0.01 0.03
Allowance for loan losses................ 0.97 1.05 1.26 1.55 1.81
Allowance as a percent of each of the
following:
Total loans and loans held for sale, net
of unearned income..................... 0.94 1.01 1.22 1.42 1.79
Total delinquent loans (past due 30 to 89
days).................................. 104.22 69.52 60.90 65.71 104.12
Total non-accrual loans.................. 210.02 206.01 187.80 209.41 198.40
Total non-performing assets.............. 77.48 130.22 136.75 153.72 158.22
Allowance as a multiple of net
charge-offs.............................. 4.55X 5.39x 8.82x 7.96x 24.09x
Total classified loans..................... $ 24,049 $ 28,307 $ 26,184 $ 24,027 $ 28,355
========== ========== ======== ======== ========
</TABLE>
The Company recorded a provision for loan losses of $1.9 million in 1999,
$600,000 in 1998, and $158,000 in 1997. When expressed as a percentage of
average loans, the provision has increased from 0.02% to 0.18% over this
three-year period. Factors contributing to the increased loan loss provision in
1999 included higher net-charge-offs and continued growth of higher risk
commercial and commercial real-estate loans. The Company's net charge-offs
amounted to $2.3 million or 0.21% of average loans in 1999, $2.0 million or
0.19% of average loans in 1998, and $1.4 million or 0.14% in 1997. Overall, the
Company's allowance for loan losses was 77% of non-performing assets and 210% of
non-accrual loans at December 31, 1999. The reduction in the non-performing
assets coverage ratio is due to the previously mentioned increase in other real
estate owned. The Company expects its provision level to at a minimum match and
more likely exceed net-charge-offs in 2000. This is due to the inherent risk in
the loan portfolio resulting from increased holdings of commercial and
commercial real estate loans. USBANCORP management is unable to determine in
what loan category future charge-offs and recoveries may occur.
22
<PAGE> 24
The following schedule sets forth the allocation of the allowance for loan
losses among various categories. This allocation is determined by using the
consistent quarterly procedural discipline that was previously discussed. The
entire allowance for loan losses is available to absorb future loan losses in
any loan category.
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
CATEGORY CATEGORY CATEGORY
AMOUNT TO LOANS AMOUNT TO LOANS AMOUNT TO LOANS
------- ---------- ------- ---------- ------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 1,991 13.9% $ 1,379 13.1% $ 1,670 14.4%
Commercial loans secured
by real estate........ 2,928 37.1 2,082 32.1 2,543 30.6
Real estate-mortgage.... 791 43.3 1,038 47.0 414 45.9
Consumer................ 631 5.7 1,563 7.8 1,506 9.1
Allocation to general
risk.................. 4,009 4,663 5,980
------- ------- -------
Total................... $10,350 $10,725 $12,113
======= ======= =======
<CAPTION>
AT DECEMBER 31
-------------------------------------------
1996 1995
-------------------- --------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
EACH EACH
CATEGORY CATEGORY
AMOUNT TO LOANS AMOUNT TO LOANS
------- ---------- ------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Commercial.............. $ 2,118 14.7% $ 3,212 12.3%
Commercial loans secured
by real estate........ 2,796 28.4 3,286 21.5
Real estate-mortgage.... 472 45.6 345 50.2
Consumer................ 959 11.3 600 16.0
Allocation to general
risk.................. 6,984 7,471
------- -------
Total................... $13,329 $14,914
======= =======
</TABLE>
Even though real estate-mortgage loans comprise 43% of the Company's total
loan portfolio, only $791,000 or 7.6% of the total allowance for loan losses is
allocated against this loan category. The real estate-mortgage loan allocation
is based primarily upon the Company's five-year historical average of actual
loan charge-offs experienced in that category and other qualitative factors. The
disproportionately higher allocations for commercial loans and commercial loans
secured by real estate reflect the increased credit risk associated with this
type of lending. The increase in allocated reserves to these two portfolio types
at December 31, 1999, versus December 31, 1998, is driven by the continued
growth of these portfolios and higher charge-offs experienced in fiscal 1999
versus 1998. At December 31, 1999, the commercial and commercial real-estate
loan balances grew by 9% and 19% over the December 31, 1998, balances. The
fiscal year over year net charge-offs also increased by $721,000 for the
commercial portfolio and $199,000 for the commercial real-estate portfolio.
Other factors considered by the Company that led to increased allocations to the
commercial and commercial real-estate portfolios are the potential adverse
effects of the rising interest rate environment experienced in the latter half
of fiscal year 1999, the continued increase in concentration risk in single
borrowers and the overall growth in the average size associated with these
credits.
In addition to the specific and formula-driven reserve calculations, the
Company has consistently established a general unallocated reserve to provide
for risk inherent in the loan portfolio as a whole. Management believes that its
judgment with respect to the establishment of the general unallocated reserve
has been validated by experience and prudently reflects the model and estimation
risk associated with the specific and formula driven allowances. The Company
determines the unallocated reserve based on a variety of factors, some of which
also are components of the formula-driven methodology. These include, without
limitation, the previously mentioned qualitative factors along with general
economic data, management's assessment of the direction of interest rates, and
credit concentrations. In conjunction with the establishment of the general
unallocated reserve, the Company also looks at the total allowance for loan
losses in relation to the size of the total loan portfolio, the level of
non-performing assets, and its coverage of these items as compared to peer
comparable banking companies.
Based on the Company's loan loss reserves methodology and the related
assessment of the inherent risk factors contained within the Company's loan
portfolio, management believes that the allowance for loan losses was adequate
for each of the fiscal years presented in the table above.
NON-INTEREST INCOME. . .Non-interest income for 1999 totaled $24.4 million
which represented a $685,000 or 2.9% increase when compared to 1998. This
increase was primarily due to the following items:
- a $453,000 or 10.2% increase in trust fees to $4.9 million in 1999. This
trust fee growth reflects increased assets under management due to the
profitable expansion of the Company's trust operations.
23
<PAGE> 25
- a $948,000 or 25.6% increase in gains realized on loans held for sale due
to a $1.6 million gain realized on the sale of the Company's $14 million
credit card portfolio. As a result of the 16% premium recognized on the
sale, the Company was able to profitably exit a line of business where it
did not have the scale to effectively compete on a long-term basis. This
item was partially offset by reduced gains on mortgage loan sales as a
drop in mortgage refinancing activity reduced both the volume and spread
on loan sales into the secondary market.
- a $1.8 million decrease in gains realized on investment security sales as
the steeper yield curve limited investment portfolio repositioning
opportunities in 1999.
- a $402,000 or 5.9% increase in other income due in part to additional
income resulting from ATM surcharging, commercial leasing fees, and
revenue generated from annuity and mutual fund sales in the Company's
financial service subsidiaries.
- a $540,000 gain on the sale of a small marginally profitable branch
office with approximately $6 million in deposits. The Company received an
8.5% premium for the core deposits in that branch office.
- a $97,000 increase in net mortgage servicing fees due to reduced
amortization expense on mortgage servicing rights due to slower
prepayment fees.
The following chart highlights some of the key information related to SMC's
mortgage servicing portfolio:
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------
1999 1998
-------- ----------
(IN THOUSANDS, EXCEPT
PERCENTAGES AND
PREPAYMENT DATA)
<S> <C> <C>
MSR portfolio balance....................................... $922,042 $1,175,138
Fair value of MSRs based upon discounted cash flow of
servicing portfolio....................................... 14,190 16,447
Fair value as a percentage of MSR balance................... 1.54% 1.40%
PSA prepayment speed........................................ 187 289
Weighted average portfolio interest rate.................... 7.55% 7.58%
</TABLE>
A rollforward of the MSRs is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance as of December 31, 1998............................. $ 16,197
Acquisition of servicing rights............................. 9,618
Impairment charge reversal.................................. 776
Sale of servicing rights.................................... (10,463)
Amortization of servicing rights............................ (2,618)
--------
Balance as of December 31, 1999............................. $ 13,510
========
</TABLE>
Non-interest income as a percentage of total revenue increased from 26.6%
in 1998 to 27.1% in 1999. The diversification of the revenue stream will
continue to be a key strategic focal point for the Company in the future.
Non-interest income for 1998 totaled $23.7 million which represented a $3.5
million or 17.3% increase when compared to 1997. This increase was primarily due
to the following items:
- a $408,000 or 10.1% increase in trust fees to $4.4 million in 1998. This
trust fee growth reflects increased assets under management due to the
profitable expansion of the Trust Company's business.
- a $1.7 million increase in gains realized on loans held for sale to $3.7
million due to heightened residential mortgage refinancing and
origination activity at the Company's mortgage banking subsidiary. Total
mortgage loans closed amounted to $450 million in 1998 compared to $253
million in 1997.
24
<PAGE> 26
Reflected in this increase the Company generated $681,000 in gains on the
sale of mortgage servicing rights.
- a $1.5 million increase in gains realized on investment security sales as
the Company focused on selling mortgage-backed securities which were
experiencing rapid prepayments in 1998. These security sales were part of
an asset liability management strategy to extend the duration of the
portfolio while maintaining yield.
- a $1.5 million or 28% increase in other income due in part to additional
income resulting from ATM surcharging, other mortgage banking processing
fees, credit card merchant income, and revenue generated from annuity and
mutual fund sales in the Company's financial service subsidiaries.
- a $1.4 million or 67% decrease in net mortgage servicing fee income to
$692,000 due to greater amortization expense on mortgage servicing rights
as a result of faster mortgage prepayment speeds in 1998.
Non-interest income as a percentage of total revenue increased from 23.2%
in 1997 to 26.6% in 1998.
NON-INTEREST EXPENSE. . .Non-interest expense for 1999 totaled $60.8
million which represented a $1.3 million or 2.2% increase when compared to 1998.
This increase was primarily due to the following items:
- a $1.7 million or 5.5% increase in salaries and employee benefits due to
merit pay increases, higher incentive pay, increased medical insurance
premiums and the additional full-time equivalent employees ("FTE")
resulting from the First Western Branches Acquisition and the acquisition
of the Republic Bank Wholesale Mortgage Banking Department.
- a $574,000 increase in equipment expense due to higher technology related
expenses such as system cost associated with wide area networks and
optical disk imaging of customer statements.
- a $827,000 increase in goodwill and core deposit amortization expense due
to the amortization expense associated with the $10 million core deposit
premium resulting from the First Western Branches Acquisition. The
amortization expense of intangible assets reduced diluted earnings per
share by $0.20.
- slower mortgage prepayment speeds and the steeper yield curve caused the
value of the Company's mortgage servicing rights to increase in 1999. As
a result of this improved valuation, the Company reversed $776,000 of the
impairment reserve on mortgage servicing rights that had been established
in 1998. This partial reversal of the impairment reserve favorably
reduced non-interest expense in 1999.
Non-interest expense for 1998 totaled $59.5 million which represented a
$5.4 million or 10.0% increase when compared to 1997. This increase was
primarily due to the following items:
- a $2.2 million or 7.9% increase in salaries and employee benefits due to
merit pay increases, higher commission and incentive payments, increased
pension expense and higher medical insurance premiums. The Company also
incurred $350,000 of severance costs resulting from a realignment of the
Company's retail banking division and human resources function.
- a $377,000 or 11.6% increase in equipment expense due to increased
technology related expenses.
- an $831,000 expense related to the establishment of an impairment reserve
on the mortgage servicing portfolio. This reserve was needed on certain
tranches of mortgage servicing rights whose market value had fallen below
cost due to accelerated prepayment speeds and low long-term interest
rates.
- a $1.4 million increase in other expense due to higher outside processing
fees, increased advertising expense, heightened foreclosure losses and
costs associated with Year 2000 compliance.
YEAR 2000. . .During the past two years, the Company actively worked on the
Year 2000 computer issue to ensure that both its information technology and
non-information technology systems and applications were Y2K compliant. The Bank
completed the inventory, assessment, remediation, testing, and implementation
phases of its Year 2000 program. Mission critical systems which had maintenance
applied since their original
25
<PAGE> 27
Y2K test were retested. The organization practiced "clean management" of all
mission critical and critical systems.
The Y2K process has required that the Company work with vendors,
third-party service providers, and customers to determine the extent to which
the Bank was vulnerable to these parties' failure to remediate their own Year
2000 issue. Prior to December 31, 1999, all mission critical vendors affirmed
their Year 2000 compliance, and no mission critical system vendor changes
occurred.
The Bank's business resumption plan was expanded to address the potential
problems of Y2K such as a loss of power, telecommunications, or the failure of a
mission critical vendor. An outside consulting firm was retained to create a
company wide business resumption plan. The firm used its considerable experience
with business resumption planning and the existing company contingency plans to
create a business resumption plan which supported our continued operation in the
face of external or internal Y2K caused disruptions. No such disruptions
occurred.
As of the date of this filing, the Company is not aware of any event that
has occurred with respect to the Y2K issue that has caused or is likely to cause
a material adverse effect on the business, financial condition or results of
operations of the Company. The Company did not suffer any system failures or
miscalculations causing disruptions of operations in connection with the
occurrence of Y2K.
Notwithstanding the foregoing, the Company recognizes the serious risks it
faces regarding credit customers not properly remediating their automated
systems to conform with Year 2000 related problems. The failure of a loan
customer to prepare adequately to conform with Year 2000 could have an adverse
effect on such customer's operations and profitability, in turn limiting their
ability to repay loans in accordance with scheduled terms. The Company completed
a detailed analysis of its major loan customer's compliance with Year 2000. The
focus of the analysis was on commercial credit exposures with balances in excess
of $250,000 and included discussions between loan officers, customers, and
information system representatives in select cases. As a result of this analysis
and follow-up after January 1, 2000, the Company currently believes that the
potential customer credit risk with Year 2000 is minimal and will not have a
material adverse effect on the Bank's business, financial condition or results
of operations.
The Company did not incur any liquidity problems in connection with the
occurrence of Y2K. From an asset/liability standpoint, throughout 1999 the
Company emphasized deposit products that encouraged extension of shorter term
maturities to products maturing after December 31, 1999, in order to limit
liquidity risk. Additionally during the fourth quarter of 1999, the Company had
maintained higher levels of non-earning cash balances and had used higher cost
alternative funding sources such as brokered CDs to ensure adequate liquidity
reserves were in place. The actual outflow of deposits during the weeks prior to
January 1, 2000, was only slightly above normal.
The Company used both internal and external resources to complete its
comprehensive Y2K compliance program. The Company estimates that the total cost
to achieve Y2K compliance was approximately $1.7 million which was at the high
end of its earlier estimate of $1.4 to $1.7 million. Approximately 66% of this
total cost represents incremental expenses to the Company while approximately
34% represents the internal cost of redeploying existing information technology
resources to the Y2K issue. The Company does not believe that these expenditures
had, or will have, a material impact on its results of operation, liquidity, or
capital resources.
NET OVERHEAD BURDEN. . .The Company's efficiency ratio (non-interest
expense divided by total revenue) increased to 65.4% in 1999 compared to 64.8%
for 1998. Factors contributing to the higher efficiency ratio in 1999 included
the compression experienced in the net interest margin, reduced revenue at the
mortgage banking subsidiary, and an increased level of non-interest expenses
which included Year 2000 costs. Additionally, the repurchase of the Company's
stock has a favorable impact on return on equity but a negative impact on the
efficiency ratio due to the interest cost associated with borrowings which
provide funds to repurchase the stock (i.e. the $2.9 million of interest expense
on the $34.5 million of guaranteed junior subordinated deferrable interest
debentures). The amortization of intangible assets also creates a $3.1 million
annual non-cash charge that negatively impacts the efficiency ratio. The
efficiency ratio for 1999, stated on a
26
<PAGE> 28
cash basis excluding the intangible amortization, was 62.0% or 3.4% lower than
the reported efficiency ratio of 65.4%. Net overhead expense as a percentage of
tax equivalent net interest income was relatively consistent between periods at
53.0%. Total assets per employee improved 7.6% from $3.0 million for 1998 to
$3.2 million for 1999.
INCOME TAX EXPENSE. . .The Company's provision for income taxes for 1999
was $6.9 million reflecting an effective tax rate of 25.3%. The Company's income
tax provision and effective tax rate were $7.7 million or 26.6% in 1998 and $9.3
million or 28.4% in 1997. The lower income tax expense and effective tax rate in
both 1999 and 1998 was due to a reduced level of pre-tax income combined with an
increased level of tax-free income. Tax-free asset holdings consist primarily of
municipal investment securities, bank owned life insurance, and commercial loan
tax anticipation notes.
Subsequent to December 31, 1999, the Internal Revenue Service completed its
examination of USBANCORP's 1995-1997 tax returns. Consequently, Three Rivers
Bank anticipates reversing its $325,000 valuation allowance and reducing its
income tax expense and accrued income taxes by approximately $600,000 during the
first quarter of 2000.
BALANCE SHEET. . .The Company's total consolidated assets were $2.467
billion at December 31, 1999, compared with $2.377 billion at December 31, 1998,
which represents an increase of $90 million or 3.8% due largely to the funds
provided from the First Western Branches Acquisition. During 1999, total loans
and loans held for sale increased by approximately $33 million or 3.0% due to
continued growth in commercial and commercial mortgage loans and the consumer
loans acquired from First Western. This loan portfolio growth occurred despite
the sale of the Company's $14 million credit card portfolio and a $30 million
reduction in loans held for sale due to a slow down in mortgage refinance
activity. Total investment securities increased by $18 million as the acquired
deposits were used to purchase securities. Cash balances at December 31, 1999
were $20 million higher than the prior year-end due to a build up of cash in
anticipation of potential deposit outflows due to Year 2000. No material deposit
outflows materialized. Intangible assets increased by $7 million due to the core
deposit intangible resulting from the First Western Branches Acquisition.
Total deposits increased by $55 million or 4.6% since December 31, 1998,
due to the acquisition of the First Western Branches. Deposit totals were
negatively impacted by the sale of a $6.0 million marginally profitable branch
office and run-off of certificates of deposit. The Company's total borrowed
funds position increased by $73 million in order to fund the earning asset
growth. Growth in Advances from the Federal Home Loan Bank more than offset
reduced short term borrowings and fed funds purchased. Total equity declined by
$29 million due to a decline in accumulated other comprehensive income as a
result of a decrease in the market value of the available for sale securities
portfolio and increased holdings of treasury stock.
INTEREST RATE SENSITIVITY. . .Asset/liability management involves managing
the risks associated with changing interest rates and the resulting impact on
the Company's net interest income, net income and capital. The management and
measurement of interest rate risk at USBANCORP is performed by using the
following tools: 1) Simulation modeling which analyzes the impact of interest
rate changes on net interest income, net income and capital levels over specific
future time periods. The simulation modeling forecasts earnings under a variety
of scenarios that incorporate changes in the absolute level of interest rates,
the shape of the yield curve, prepayments and changes in the volumes and rates
of various loan and deposit categories. The simulation modeling also
incorporates all off balance sheet hedging activity as well as assumptions about
reinvestment and the repricing characteristics of certain assets and liabilities
without stated contractual maturities. 2) Static "GAP" analysis which analyzes
the extent to which interest rate sensitive assets and interest rate sensitive
liabilities are matched at specific points in time. 3) Market value of portfolio
equity sensitivity analysis. The overall interest rate risk position and
strategies are reviewed by senior management and the Company's Board of
Directors on an ongoing basis.
27
<PAGE> 29
The following table presents a summary of the Company's static GAP
positions at December 31, 1999:
<TABLE>
<CAPTION>
OVER OVER
3 MONTHS 6 MONTHS
3 MONTHS THROUGH THROUGH OVER
INTEREST SENSITIVITY PERIOD OR LESS 6 MONTHS 1 YEAR 1 YEAR TOTAL
- --------------------------- ---------- --------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Loans......................... $ 274,558 $ 80,875 $ 102,066 $ 627,955 $1,085,454
Investment securities......... 175,591 43,131 74,365 894,248 1,187,335
Short-term assets............. 758 -- -- -- 758
Other assets.................. -- -- 37,290 -- 37,290
---------- --------- --------- ---------- ----------
Total rate sensitive
assets................... $ 450,907 $ 124,006 $ 213,721 $1,522,203 $2,310,837
========== ========= ========= ========== ==========
Rate sensitive liabilities:
Deposits:
Non-interest bearing
deposits................. $ -- $ -- $ -- $ 160,253 $ 160,253
NOW and Super NOW........... -- -- -- 88,661 88,661
Money market................ 177,935 -- -- -- 177,935
Other savings............... -- -- -- 162,653 162,653
Certificates of deposit of
$100,000 or more......... 37,542 4,416 5,764 3,200 50,922
Other time deposits......... 141,784 90,954 150,077 207,702 590,517
---------- --------- --------- ---------- ----------
Total deposits........... 357,261 95,370 155,841 622,469 1,230,941
Borrowings.................... 725,223 313 140,598 233,708 1,099,842
========== ========= ========= ========== ==========
Total rate sensitive
liabilities............ $1,082,484 $ 95,683 $ 296,439 $ 856,177 $2,330,783
Off-balance sheet hedges...... (390,000) 120,000 130,000 140,000 --
========== ========= ========= ========== ==========
Interest sensitivity GAP:
Interval.................... (241,577) (91,677) (212,718) 526,026
Cumulative.................. $ (241,577) $(333,254) $(545,972) $ (19,946) $ (19,946)
========== ========= ========= ========== ==========
Period GAP ratio.............. 0.65x 0.57x 0.50x 1.53x
Cumulative GAP ratio.......... 0.65 0.63 0.59 0.99
Ratio of cumulative GAP to
total assets................ (9.79)% (13.51)% (22.13)% (0.81)%
========== ========= ========= ==========
</TABLE>
When December 31, 1999, is compared to December 31, 1998, both the
Company's six month and one year cumulative GAP ratios became more negative due
largely to reduced asset sensitivity resulting from slower prepayment speeds on
mortgage-backed securities. An increase in the Company's short-term FHLB
borrowings combined with the anticipated call of certain FHLB advances also
contributed to increased rate sensitive liabilities. As separately disclosed in
the above table, the off-balance sheet hedge transactions (described in detail
in Note #21) reduced the negativity of the cumulative one-year GAP position by
$140 million.
A portion of the Company's funding base is low cost core deposit accounts
which do not have a specific maturity date. The accounts that comprise these low
cost core deposits include passbook savings accounts, money market accounts, NOW
accounts, and daily interest savings accounts. At December 31, 1999, the balance
in these accounts totaled $429 million or 17.4% of total assets. Within the
above static GAP table, approximately $178 million or 41% of these core deposits
are assumed to be rate sensitive liabilities which reprice in one year or less;
this assumption is based upon historical experience in varying interest rate
environments and is reviewed annually for reasonableness. The Company recognizes
that the pricing of these accounts is somewhat inelastic when compared to normal
rate movements.
28
<PAGE> 30
There are some inherent limitations in using static GAP analysis to measure
and manage interest rate risk. For instance, certain assets and liabilities may
have similar maturities or periods to repricing but the magnitude or degree of
the repricing may vary significantly with changes in market interest rates. As a
result of these GAP limitations, management places primary emphasis on
simulation modeling to manage and measure interest rate risk. The Company's
asset liability management policy seeks to limit net interest income variability
over a twelve month period to P7.5% and net income variability to P15.0% based
upon varied economic rate forecasts which include interest rate movements of up
to 200 basis points and alterations of the shape of the yield curve.
Additionally, the Company also uses market value sensitivity measures to further
evaluate the balance sheet exposure to changes in interest rates. Market value
of portfolio equity sensitivity analysis captures the dynamic aspects of
long-term interest rate risk across all time periods by incorporating the net
present value of expected cash flows from the Company's assets and liabilities.
The Company monitors the trends in market value of portfolio equity sensitivity
analysis on a quarterly basis.
The following table presents an analysis of the sensitivity inherent in the
Company's net interest income, net income and market value of portfolio equity.
The interest rate scenarios in the table compare the Company's base forecast or
most likely rate scenario at December 31, 1999, to scenarios which reflect
ramped increases and decreases in interest rates of 200 basis points along with
performance in a stagnant rate scenario with interest rates held flat at the
December 31, 1999, levels. The Company's most likely rate scenario is based upon
published economic consensus estimates which currently forecast an increase in
interest rates over the next twelve-month period. Each rate scenario contains
unique prepayment and repricing assumptions which are applied to the Company's
expected balance sheet composition which was developed under the most likely
interest rate scenario.
<TABLE>
<CAPTION>
CHANGE IN
MARKET
VARIABILITY OF VALUE OF
INTEREST RATE NET INTEREST VARIABILITY OF PORTFOLIO
SCENARIO INCOME NET INCOME EQUITY
------------- -------------- -------------- ---------
<S> <C> <C> <C>
Base..................................................... 0% 0% 0%
Flat..................................................... 1.7 4.2 (17.47)
200 bp increase.......................................... (4.3) (13.1) (62.08)
200 bp decrease.......................................... 1.9 0.4 49.81
</TABLE>
As indicated in the table, the maximum negative variability of USBANCORP's
net interest income and net income over the next twelve month period was (4.3%)
and a (13.1%) respectively, under an upward rate shock forecast reflecting a 200
basis point increase in interest rates. The noted variability under this
forecast was within the Company's ALCO policy limits. The variability of market
value of portfolio equity was (62%) under this interest rate scenario. The
off-balance sheet borrowed funds hedges also helped reduce the variability of
forecasted net interest income, net income and market value of portfolio equity
in a rising interest rate environment. Finally, this sensitivity analysis is
limited by the fact that it does not include any balance sheet repositioning
actions the Company may take should severe movements in interest rates occur
such as lengthening or shortening the duration of the securities portfolio or
entering into additional off-balance sheet hedging transactions. These actions
would likely reduce the variability of each of the factors identified in the
above table in the more extreme interest rate shock forecasts.
Within the investment portfolio at December 31, 1999, 100% of the portfolio
is classified as available for sale. The available for sale classification
provides management with greater flexibility to manage the securities portfolio
to better achieve overall balance sheet rate sensitivity goals and provide
liquidity to fund loan growth if needed. The mark to market of the available for
sale securities does inject more volatility in the book value of equity but has
no impact on regulatory capital. Furthermore, it is the Company's intent to
continue to diversify its loan portfolio to increase liquidity and rate
sensitivity and to better manage USBANCORP's long-term interest rate risk by
continuing to sell newly originated fixed-rate 30-year mortgage loans.
LIQUIDITY. . .Financial institutions must maintain liquidity to meet
day-to-day requirements of depositor and borrower customers, take advantage of
market opportunities, and provide a cushion against unforeseen needs. Liquidity
needs can be met by either reducing assets or increasing liabilities. Sources of
29
<PAGE> 31
asset liquidity are provided by short-term investment securities, time deposits
with banks, federal funds sold, banker's acceptances, and commercial paper.
These assets totaled $111 million at December 31, 1999, compared to $382 million
at December 31, 1998. Maturing and repaying loans, as well as the monthly cash
flow associated with mortgage-backed securities are other significant sources of
asset liquidity for the Company.
Liability liquidity can be met by attracting deposits with competitive
rates, using repurchase agreements, buying federal funds, or utilizing the
facilities of the Federal Reserve or the Federal Home Loan Bank systems.
USBANCORP's subsidiaries utilize a variety of these methods of liability
liquidity. At December 31, 1999, USBANCORP's subsidiaries had approximately $100
million of unused lines of credit available under informal arrangements with
correspondent banks compared to $115 million at December 31, 1998. These lines
of credit enable USBANCORP's subsidiaries to purchase funds for short-term needs
at current market rates. Additionally, each of the Company's subsidiary banks
are members of the Federal Home Loan Bank which provides the opportunity to
obtain intermediate to longer term advances up to approximately 80% of their
investment in assets secured by one- to four-family residential real estate.
This would suggest a remaining current total available Federal Home Loan Bank
aggregate borrowing capacity of approximately $169 million. Furthermore, the
Parent Company had available at December 31, 1999, $13.5 million of a total
$17.0 million unsecured line of credit.
Liquidity can be analyzed by utilizing the Consolidated Statement of Cash
Flows. Cash equivalents increased by $16 million from December 31, 1998, to
December 31, 1999, due primarily to $106 million of net cash provided by
financing activities and $51 million of net cash provided by operating
activities. This more than offset $140 million of net cash used by investing
activities. Within investing activities, purchases of investment securities
exceeded cash proceeds from investment security maturities and sales by $77
million. Cash advanced for new loan fundings totaled a record $414 million and
was approximately $52 million greater than the cash received from loan principal
payments. Within financing activities, net deposits increased by $55 million due
primarily to the First Western Branches Acquisition. Advances from the Federal
Home Loan Bank provided $205 million of cash which was used to paydown $129
million of short-term borrowings and fund overall earning asset growth. The
Company used $8.7 million of cash to pay common dividends to shareholders and
$2.9 million of cash to service the dividend on the guaranteed junior
subordinated deferrable interest debentures.
CAPITAL RESOURCES. . .As presented in Note #23, each of the Company's
regulatory capital ratios decreased between December 31, 1998, and December 31,
1999, due to a reduction in tangible equity resulting from the $10 million core
deposit premium associated with the First Western Branches Acquisition.
Specifically, the Tier 1 capital and asset leverage ratio decreased modestly
from 13.57% and 6.62% at December 31, 1998, to 12.87% and 6.41% at December 31,
1999. The Company targets an operating range of 6.0% to 6.50% for the asset
leverage ratio because management and the Board of Directors believes that this
level provides an optimal balance between regulatory capital requirements and
shareholder value needs. Strategies the Company uses to manage its capital
ratios include common dividend payments, treasury stock repurchases, and earning
asset growth.
The Company repurchased 243,000 shares or $4.2 million of its common stock
during 1999. Through December 31, 1999, the Company has repurchased a total of
4.1 million shares of its common stock at a total cost of $65.7 million. The
Company has suspended its treasury stock repurchase program in order to build
capital ratios in anticipation of the planned spin-off of its' Three Rivers Bank
subsidiary at the end of the first quarter of 2000. The Company plans to resume
its treasury stock repurchase program post spin-off.
The Company exceeds all regulatory capital ratios for each of the periods
presented. Furthermore, each of the Company's subsidiary banks are considered
"well capitalized" under all applicable FDIC regulations. It is the Company's
intent to maintain the FDIC "well capitalized" classification for each of its
subsidiaries to ensure the lowest deposit insurance premium.
The Company's declared Common Stock cash dividend per share was $0.59 for
1999 which was comparable with the $0.60 in dividends paid in 1998. Note that
the 1998 dividends included a special dividend of $0.06 per share. There were no
special dividends declared in 1999. The current dividend yield on
30
<PAGE> 32
the Company's common stock approximates 5.7%. The Company's Board of Directors
believes that a better than peer common dividend is a key component of total
shareholder return particularly for retail shareholders.
PROPOSED TAX-FREE SPIN-OFF PLAN. . .As discussed in Note #20, The Company
plans to spin-off its Three Rivers Bank and Trust subsidiary on April 1, 2000
pending regulatory approvals. Upon consummation of the proposed spin-off, the
resulting companies will have the following corporate profiles based upon
financial data as of December 31, 1999.
PRO FORMA FINANCIAL INFORMATION
AS OF DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
USBANCORP THREE RIVERS BANCORP, INC.
------------ ----------------------------
<S> <C> <C>
Total Assets........................................... $1.4 billion $1.1 billion
Total Loans............................................ $616 million $480 million
Total Deposits......................................... $658 million $573 million
Corporate Headquarters................................. Johnstown Monroeville
Deposit Market Share in Primary County................. 25% 2%
1999 Net Income........................................ $10,451,000 $9,970,000
1999 EPS Contribution.................................. $0.78 $0.74
Return on Equity....................................... 13.7% 17.9%
</TABLE>
FORWARD-LOOKING STATEMENT. . .This annual report contains various
forward-looking statements and includes assumptions concerning Three Rivers'
beliefs, plans, objectives, goals, expectations, anticipations estimates,
intentions, operations, future results, and prospects, including statements that
include the words "may," "could," "should," "would," "believe," "expect,"
"anticipate," "estimate," "intend," "plan" or similar expressions. These
forward-looking statements are based upon current expectations and are subject
to risk and uncertainties. In connection with the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, Three Rivers provides the
following cautionary statement identifying important factors (some of which are
beyond Three Rivers' control) which could cause the actual results or events to
differ materially from those set forth in or implied by the forward-looking
statements and related assumptions.
Such factors include the following: (i) risk resulting from the
Distribution and the operation of Three Rivers Bank as a separate independent
company, (ii) the effect of changing regional and national economic conditions;
(iii) the effects of trade, monetary and fiscal policies and laws, including
interest rate policies of the Board of Governors of the Federal Reserve System;
(iv) significant changes in interest rates and prepayment speeds; (v) inflation,
stock and bond market, and monetary fluctuations; (vi) credit risks of
commercial, real estate, consumer, and other lending activities; (vii) changes
in federal and state banking and financial services laws and regulations; (viii)
the presence in the Company's market area of competitors with greater financial
resources than the Company; (ix) the timely development of competitive new
products and services by the Company and the acceptance of those products and
services by customers and regulators (when required); (x) the willingness of
customers to substitute competitors' products and services for those of the
Company and vice versa; (xi) changes in consumer spending and savings habits;
(xii) unanticipated regulatory or judicial proceedings; and (xiii) other
external developments which could materially impact the Company's operational
and financial performance.
The foregoing list of important factors is not exclusive, and neither such
list nor any forward-looking statement takes into account the impact that any
future acquisition may have on the Company and on any such forward-looking
statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company's financial
instruments, see "Interest Rate Sensitivity" in the MD&A presented on pages 26
to 28. The Company's principal market risk exposure is to interest rates.
31
<PAGE> 33
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 54,676 $ 35,085
Interest bearing deposits................................... 758 3,855
Investment securities:
Available for sale........................................ 1,187,335 661,491
Held to maturity (market value $516,452 on December 31,
1998).................................................. -- 508,142
Loans held for sale......................................... 21,753 51,317
Loans....................................................... 1,082,459 1,020,280
Less: Unearned income..................................... 8,408 5,276
Allowance for loan losses........................... 10,350 10,725
---------- ----------
Net loans................................................... 1,063,701 1,004,279
---------- ----------
Premises and equipment...................................... 18,937 18,020
Accrued income receivable................................... 16,650 17,150
Mortgage servicing rights................................... 13,510 16,197
Goodwill and core deposit intangibles....................... 25,655 18,697
Bank owned life insurance................................... 37,290 35,622
Other assets................................................ 27,214 7,226
---------- ----------
TOTAL ASSETS................................................ $2,467,479 $2,377,081
========== ==========
LIABILITIES
Non-interest bearing deposits............................... $ 160,253 $ 166,701
Interest bearing deposits................................... 1,070,688 1,009,590
---------- ----------
Total deposits.............................................. 1,230,941 1,176,291
---------- ----------
Federal funds purchased and securities sold under agreements
to repurchase............................................. 16,369 101,405
Other short-term borrowings................................. 84,874 129,003
Advances from Federal Home Loan Bank........................ 956,999 752,391
Guaranteed junior subordinated deferrable interest
debentures................................................ 34,500 34,500
Long-term debt.............................................. 7,100 9,271
---------- ----------
Total borrowed funds........................................ 1,099,842 1,026,570
---------- ----------
Other liabilities........................................... 24,139 32,550
---------- ----------
TOTAL LIABILITIES........................................... 2,354,922 2,235,411
---------- ----------
Commitments and contingent liabilities (Note #16)
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 2,000,000 shares authorized;
there were no shares issued and outstanding on December
31, 1999, and 1998........................................ -- --
Common stock, par value $2.50 per share; 24,000,000 shares
authorized; 17,390,496 shares issued and 13,309,577
outstanding on December 31, 1999; 17,350,136 shares issued
and 13,512,317 shares outstanding on December 31, 1998.... 43,476 43,375
Treasury stock at cost, 4,080,919 shares on December 31,
1999, and 3,837,819 shares on December 31, 1998........... (65,725) (61,521)
Surplus..................................................... 65,686 65,495
Retained earnings........................................... 104,294 91,737
Accumulated other comprehensive income...................... (35,174) 2,584
---------- ----------
TOTAL STOCKHOLDERS' EQUITY.................................. 112,557 141,670
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $2,467,479 $2,377,081
========== ==========
</TABLE>
- ---------------
(1) All share data has been adjusted to reflect a 3 for 1 stock split effected
in the form of a 200% stock dividend which was distributed on July 31, 1998,
to shareholders of record on July 16, 1998.
See accompanying notes to consolidated financial statements.
32
<PAGE> 34
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable............................................. $ 84,585 $ 84,510 $ 81,105
Tax exempt.......................................... 2,250 2,469 2,400
Deposits with banks................................... 121 120 190
Federal funds sold and securities purchased under
agreements to resell................................ -- 2 2
Investment securities:
Available for sale.................................. 46,506 38,139 31,769
Held to maturity.................................... 31,726 33,718 39,322
----------- ----------- -----------
Total Interest Income................................. 165,188 158,958 154,788
----------- ----------- -----------
INTEREST EXPENSE
Deposits.............................................. 41,150 40,891 42,572
Federal funds purchased and securities sold under
agreements to repurchase............................ 3,438 4,603 5,060
Other short-term borrowings........................... 7,599 5,303 3,123
Advances from Federal Home Loan Bank.................. 43,946 40,483 36,648
Guaranteed junior subordinated deferrable interest
debentures.......................................... 2,960 1,944 --
Long-term debt........................................ 411 504 526
----------- ----------- -----------
Total Interest Expense................................ 99,504 93,728 87,929
----------- ----------- -----------
Net Interest Income................................... 65,684 65,230 66,859
Provision for loan losses........................... 1,900 600 158
----------- ----------- -----------
Net Interest Income after Provision for Loan Losses... 63,784 64,630 66,701
----------- ----------- -----------
NON-INTEREST INCOME
Trust fees............................................ 4,883 4,430 4,022
Net gains on loans held for sale...................... 4,645 3,697 2,008
Net realized gains on investment securities........... 436 2,267 792
Wholesale cash processing fees........................ 603 706 976
Service charges on deposit accounts................... 3,563 3,409 3,323
Net mortgage servicing fees........................... 789 692 2,104
Bank owned life insurance............................. 1,668 1,643 1,644
Gain on sale of branch................................ 540 -- --
Other income.......................................... 7,247 6,845 5,334
----------- ----------- -----------
Total Non-Interest Income............................. 24,374 23,689 20,203
----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits........................ 32,091 30,427 28,197
Net occupancy expense................................. 4,602 4,474 4,431
Equipment expense..................................... 4,211 3,637 3,260
Professional fees..................................... 3,332 3,373 2,928
Supplies, postage, and freight........................ 2,718 2,674 2,766
Miscellaneous taxes and insurance..................... 1,810 1,568 1,483
FDIC deposit insurance expense........................ 272 272 119
Amortization of goodwill and core deposit
intangibles......................................... 3,135 2,308 2,356
</TABLE>
33
<PAGE> 35
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Impairment (credit) charge for mortgage servicing
rights.............................................. (776) 831 --
Other expense......................................... 9,420 9,956 8,564
----------- ----------- -----------
Total Non-Interest Expense............................ 60,815 59,520 54,104
----------- ----------- -----------
INCOME
BEFORE INCOME TAXES................................... 27,343 28,799 32,800
Provision for income taxes.......................... 6,922 7,655 9,303
----------- ----------- -----------
NET INCOME............................................ $ 20,421 $ 21,144 $ 23,497
=========== =========== ===========
PER COMMON SHARE DATA:(1)
Basic:
Net income....................................... $ 1.53 $ 1.51 $ 1.56
Average number of shares outstanding............. 13,340,204 14,011,893 15,043,128
Diluted:
Net income....................................... $ 1.52 $ 1.48 $ 1.54
Average number of shares outstanding............. 13,451,166 14,257,557 15,274,272
Cash dividends declared............................... $ 0.59 $ 0.60 $ 0.53
=========== =========== ===========
</TABLE>
- ---------------
(1) All per share and share data have been adjusted to reflect a 3 for 1 stock
split effected in the form of a 200% stock dividend which was distributed on
July 31, 1998, to shareholders of record on July 16, 1998.
See accompanying notes to consolidated financial statements.
34
<PAGE> 36
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
COMPREHENSIVE INCOME
Net income..................................................
$ 20,421 $21,144 $23,497
Other comprehensive income, before tax:
Unrealized holding (losses) gains arising during period...
(50,124) 3,029 3,858
Less: reclassification adjustment for gains included in
net income.............................................
(436) (2,267) (792)
-------- ------- -------
Other comprehensive (loss) income, before tax:..............
(50,560) 762 3,066
Income tax (credit) expense related to items of other
comprehensive income......................................
(12,802) 331 1,127
-------- ------- -------
Other comprehensive (loss) income, net of tax...............
(37,758) 431 1,939
-------- ------- -------
Comprehensive (loss) income.................................
$(17,337) $21,575 $25,436
======== ======= =======
</TABLE>
35
<PAGE> 37
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
PREFERRED STOCK
Balance at beginning of period............................. $ -- $ -- $ --
Balance at end of period................................... -- -- --
-------- -------- --------
COMMON STOCK
Balance at beginning of period............................. 43,375 14,402 14,356
Stock options exercised.................................... 101 75 46
Effect of 3 for 1 split in the form of a 200% stock
dividend................................................. -- 28,898 --
-------- -------- --------
Balance at end of period................................... 43,476 43,375 14,402
-------- -------- --------
TREASURY STOCK
Balance at beginning of period............................. (61,521) (31,175) (19,538)
Treasury stock, at cost.................................... (4,204) (30,346) (11,637)
-------- -------- --------
Balance at end of period................................... (65,725) (61,521) (31,175)
-------- -------- --------
CAPITAL SURPLUS
Balance at beginning of period............................. 65,495 93,934 93,527
Stock options exercised.................................... 191 459 407
Effect of 3 for 1 split in the form of a 200% stock
dividend................................................. -- (28,898) --
-------- -------- --------
Balance at end of period................................... 65,686 65,495 93,934
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............................. 91,737 78,866 63,358
Net income................................................. 20,421 21,144 23,497
Cash dividends declared.................................... (7,864) (8,273) (7,989)
-------- -------- --------
Balance at end of period................................... 104,294 91,737 78,866
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period............................. 2,584 2,153 214
Other comprehensive (loss)income, net of tax............... (37,758) 431 1,939
-------- -------- --------
Balance at end of period................................... (35,174) 2,584 2,153
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY................................. $112,557 $141,670 $158,180
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 38
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income..............................................
$ 20,421 $ 21,144 $ 23,497
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses.............................
1,900 600 158
Depreciation and amortization expense.................
2,656 2,483 2,430
Amortization expense of goodwill and core deposit
intangibles........................................
3,135 2,308 2,356
Amortization expense of mortgage servicing rights.....
2,618 2,861 1,806
Net amortization of investment securities.............
152 1,038 218
Net realized gains on investment securities...........
(436) (2,267) (792)
Net realized gains on loans held for sale.............
(4,645) (3,697) (2,008)
Origination of mortgage loans held for sale...........
(403,673) (450,639) (260,984)
Sales of mortgage loans held for sale.................
426,240 414,023 258,261
Decrease in accrued income receivable.................
500 167 45
Increase (decrease) in accrued expense payable........
1,918 (262) 1,385
--------- --------- ---------
Net cash provided (used) by operating activities........
50,786 (12,241) 26,372
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of investment securities and other short-term
investments -- available for sale.....................
(394,195) (704,113) (589,787)
Purchase of investment securities and other short-term
investments -- held to maturity.......................
(104,527) (114,967) (96,300)
Proceeds from maturities of investment securities and
other short-term investments -- available for sale....
93,650 115,247 73,845
Proceeds from maturities of investment securities and
other short-term investments -- held to maturity......
99,949 141,826 90,876
Proceeds from sales of investment securities and other
short-term investments -- available for sale..........
212,461 509,383 414,682
Proceeds from sales of investment securities and other
short-term investments -- held to maturity............
15,969 -- --
Long-term loans originated..............................
(414,016) (336,815) (322,491)
Loans held for sale.....................................
(21,753) (51,317) (13,163)
Principal collected on long-term loans..................
362,168 347,180 288,669
Loans purchased or participated.........................
(9,743) -- (2)
Loans sold or participated..............................
18,366 44 234
Net decrease in credit card receivables and other
short-term loans......................................
15,298 2,487 261
Purchases of premises and equipment.....................
(3,861) (2,947) (1,913)
Sale/retirement of premises and equipment...............
288 74 54
Net decrease in assets held in trust for collateralized
mortgage obligation...................................
1,117 1,424 992
Decrease (increase) in mortgage servicing rights........
69 (4,098) (4,272)
Net (increase) decrease in other assets.................
(11,341) (5,775) 583
--------- --------- ---------
Net cash used by investing activities...................
$(140,111) $(102,367) $(157,732)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 39
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from sales of certificates of deposit..........
$ 487,877 $ 483,384 $ 270,064
Payments for maturing certificates of deposit...........
(467,790) (471,829) (258,653)
Net increase (decrease) in demand and savings
deposits..............................................
34,563 25,209 (10,622)
Net (decrease) increase in federal funds purchased,
securities sold under agreements to repurchase, and
other short-term borrowings...........................
(129,165) 81,382 (5,931)
Net principal borrowings (repayments) on advances from
Federal Home Loan Bank................................
204,608 (1,804) 148,696
Principal borrowings of long-term debt..................
-- 11,123 5,068
Repayments of long-term debt............................
(2,171) (11,687) (4,879)
Common stock dividends paid.............................
(8,673) (8,688) (9,305)
Guaranteed junior subordinated deferrable interest
debenture dividends paid..............................
(2,916) (1,944) --
Proceeds from sale of guaranteed junior
Subordinated deferrable interest debentures, net of
expenses..............................................
-- 33,172 --
Proceeds from dividend reinvestment and stock purchase
plan and stock options exercised......................
292 534 453
Purchases of treasury stock.............................
(4,204) (30,346) (11,637)
Net (decrease) increase in other liabilities............
(6,602) 6,823 1,924
--------- --------- ---------
Net cash provided by financing activities...............
105,819 115,329 125,178
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS.............
16,494 721 (6,182)
CASH EQUIVALENTS AT JANUARY 1...........................
38,940 38,219 44,401
--------- --------- ---------
CASH EQUIVALENTS AT DECEMBER 31.........................
$ 55,434 $ 38,940 $ 38,219
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 40
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND NATURE OF OPERATIONS:
USBANCORP, Inc. (the "Company") is a multi-bank holding company
headquartered in Johnstown, Pennsylvania. Through its banking subsidiaries the
Company operates 44 banking offices in six southwestern Pennsylvania counties.
These offices provide a full range of consumer, mortgage, commercial, and trust
financial products.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, U.S. Bank ("U.S. Bank"), Three Rivers Bank
and Trust Company ("Three Rivers Bank"), including its principal subsidiary,
Standard Mortgage Corporation of Georgia, USBANCORP Trust and Financial Services
Company ("Trust Company"), United Bancorp Life Insurance Company ("United
Life"), and UBAN Associates, Inc. Intercompany accounts and transactions have
been eliminated in preparing the consolidated financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results may differ from these estimates.
INVESTMENT SECURITIES:
Securities are classified at the time of purchase as investment securities
held to maturity if it is management's intent and the Company has the ability to
hold the securities until maturity. These held to maturity securities are
carried on the Company's books at cost, adjusted for amortization of premium and
accretion of discount which is computed using the level yield method which
approximates the effective interest method. Alternatively, securities are
classified as available for sale if it is management's intent at the time of
purchase to hold the securities for an indefinite period of time and/or to use
the securities as part of the Company's asset/liability management strategy.
Securities classified as available for sale include securities which may be sold
to effectively manage interest rate risk exposure, prepayment risk, and other
factors (such as liquidity requirements). These available for sale securities
are reported at fair value with unrealized aggregate appreciation (depreciation)
excluded from income and credited (charged) to a separate component of
shareholders' equity on a net of tax basis. Any security classified as trading
assets are reported at fair value with unrealized aggregate appreciation
(depreciation) included in current income on a net of tax basis. The Company
presently does not engage in trading activity. Realized gain or loss on
securities sold was computed upon the adjusted cost of the specific securities
sold.
LOANS:
Interest income is recognized using methods which approximate a level yield
related to principal amounts outstanding. The Company's subsidiaries discontinue
the accrual of interest income when loans, except for loans that are insured for
credit loss, become 90 days past due in either principal or interest. In
addition, if circumstances warrant, the accrual of interest may be discontinued
prior to 90 days. In all cases, payments received on non-accrual loans are
credited to principal until full recovery of principal has been recognized; it
is only after full recovery of principal that any additional payments received
are recognized as interest income. The only exception to this policy is for
residential mortgage loans wherein interest income is recognized on a cash basis
as payments are received. A non-accrual loan is placed on accrual status after
becoming current and remaining current for twelve consecutive payments (except
for residential mortgage loans which only have to become current).
39
<PAGE> 41
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LOAN FEES:
Loan origination and commitment fees, net of associated direct costs, are
deferred and amortized into interest and fees on loans over the loan or
commitment period. Fee amortization is determined by either the straight-line
method, or the effective interest method, which do not differ materially.
MORTGAGE LOANS HELD FOR SALE:
Newly originated fixed-rate residential mortgage loans are classified as
"held for sale," if it is management's intent to sell these residential mortgage
loans. The residential mortgage loans held for sale are carried at the lower of
aggregate cost or market value.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is charged to operations over the estimated useful
lives of the premises and equipment using the straight-line method. Useful lives
of up to 45 years for buildings and up to 12 years for equipment are utilized.
Leasehold improvements are amortized using the straight-line method over the
terms of the respective leases or useful lives of the improvements, whichever is
shorter. Maintenance, repairs, and minor alterations are charged to current
operations as expenditures are incurred.
ALLOWANCE FOR LOAN LOSSES AND CHARGE-OFF PROCEDURES:
As a financial institution which assumes lending and credit risks as a
principal element of its business, the Company anticipates that credit losses
will be experienced in the normal course of business. Accordingly, the Company
consistently applies a comprehensive methodology and procedural discipline which
is updated on a quarterly basis at the subsidiary bank level to determine both
the adequacy of the allowance for loan losses and the necessary provision for
loan losses to be charged against earnings. This methodology includes:
- A detailed review of all criticized and impaired loans to determine if
any specific reserve allocations are required on an individual loan
basis. The specific reserve established for these criticized and impaired
loans is based on careful analysis of the loan's performance, the related
collateral value, cash flow considerations and the financial capability
of any guarantor.
- The application of formula driven reserve allocations for all commercial
and commercial real-estate loans are calculated by using a three-year
migration analysis of net losses incurred within each risk grade for the
entire commercial loan portfolio. The difference between estimated and
actual losses is reconciled through the dynamic nature of the migration
analysis.
- The application of formula driven reserve allocations to installment and
mortgage loans which are based upon historical charge-off experience for
those loan types. The residential mortgage loan allocation is based upon
the Company's five-year historical average of actual loan charge-offs
experienced in that category. The same methodology is used to determine
the allocation for consumer loans except the allocation is based upon an
average of the most recent actual three-year historical charge-off
experience for consumer loans.
- The application of formula driven reserve allocations to all outstanding
loans and certain unfunded commitments is based upon review of historical
losses and qualitative factors, which include but are not limited to,
economic trends, delinquencies, concentrations of credit, trends in loan
volume, experience and depth of management, examination and audit
results, effects of any changes in lending policies and trends in policy
exceptions.
- The maintenance of a general unallocated reserve to accommodate inherent
risk in the Company's portfolio that is not identified through the
Company's specific loan and portfolio segment reviews
40
<PAGE> 42
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discussed above. Management recognizes that there may be events or
economic factors that have occurred effecting specific borrowers or segments of
borrowers that may yet be fully reflected in the information that the
Company uses for arriving at a specific loan or portfolio segment
reserves. Therefore, the Company and its Board of Directors believe a
general unallocated reserve is needed to recognize the estimation risk
associated with the specific and formula driven allowances. In conjunction
with the establishment of the general unallocated reserve, the Company
also looks at the total allowance for loan losses in relation to the size
of the total loan portfolio, the level of non-performing assets and its
coverage of these items as compared to peer banks.
After completion of this process, a formal meeting of the Loan Loss Reserve
Committee is held to evaluate the adequacy of the reserve and establish the
provision level for the next quarter. The Company believes that the procedural
discipline, systematic methodology, and comprehensive documentation of this
quarterly process is in full compliance with all regulatory requirements and
provides appropriate support for accounting purposes.
When it is determined that the prospects for recovery of the principal of a
loan have significantly diminished, the loan is immediately charged against the
allowance account; subsequent recoveries, if any, are credited to the allowance
account. In addition, non-accrual and large delinquent loans are reviewed
monthly to determine potential losses. Consumer loans are considered losses when
they are 90 days past due, except loans that are insured for credit loss.
The Company's policy is to individually review, as circumstances warrant,
each of its commercial and commercial mortgage loans to determine if a loan is
impaired. At a minimum, credit reviews are mandatory for all commercial and
commercial mortgage loans with balances in excess of $500,000 within an 18 month
period. The Company has also identified two pools of small dollar value
homogeneous loans which are evaluated collectively for impairment. These
separate pools are for residential mortgage loans and consumer loans. Individual
loans within these pools are reviewed and removed from the pool if factors such
as significant delinquency in payments of 90 days or more, bankruptcy, or other
negative economic concerns indicate impairment.
PURCHASED AND ORIGINATED MORTGAGE SERVICING RIGHTS:
The Company recognizes as assets the rights to service mortgage loans for
others whether the servicing rights are acquired through purchases or
originations. Purchased mortgage servicing rights are capitalized at cost. For
loans originated and sold where servicing rights have been retained, the Company
allocates the cost of originating the loan to the loan (without the servicing
rights) and the servicing rights retained based on their relative fair market
values if it is practicable to estimate those fair values. Where it is not
practicable to estimate the fair values, the entire cost of originating the loan
is allocated to the loan without the servicing rights. For purposes of
evaluating and measuring impairment, the Company stratifies the rights based on
risk characteristics. If the discounted projected net cash flows of a stratum
are less than the carrying amount of the stratum, the stratum is written down to
the amount of the discounted projected net cash flows through a valuation
account. This writedown is recorded in the line item on the Consolidated
Statement of Income titled "Impairment charge for mortgage servicing rights".
The Company has determined that the predominant risk characteristics of its
portfolio are loan type and interest rate. For the purposes of evaluating
impairment, the Company has stratified its portfolio in 200 basis point tranches
by loan type. Mortgage servicing rights are amortized in proportion to, and over
the period of, estimated net servicing income. The value of mortgage servicing
rights is subject to interest rate and prepayment risk. It is likely that the
value of these assets will decrease if prepayments occur at greater than the
expected rate.
TRUST FEES:
All trust fees are recorded on the cash basis which approximates the
accrual basis for such income.
41
<PAGE> 43
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER COMMON SHARE:
Basic earnings per share includes only the weighted average common shares
outstanding. Diluted earnings per share includes the weighted average common
shares outstanding and any dilutive common stock equivalent shares in the
calculation. Treasury shares are treated as retired for earnings per share
purposes.
COMPREHENSIVE INCOME:
In January 1998, the Company adopted SFAS #130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components in a financial statement. For the Company,
comprehensive income includes net income and unrealized holding gains and losses
from available for sale investment securities. The balances of other accumulated
comprehensive (loss) income were $(35,174,000), $2,584,000 and $2,153,000 at
December 31, 1999, 1998 and 1997, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS:
On a consolidated basis, cash equivalents include cash and due from banks,
interest bearing deposits with banks, and federal funds sold and securities
purchased under agreements to resell. For the Parent Company, cash equivalents
also include short-term investments. The Company made $4,927,000 in income tax
payments in 1999; $6,695,000 in 1998; and $7,783,000 in 1997. The Company made
total interest expense payments of $97,586,000 in 1999; $93,990,000 in 1998; and
$86,544,000 in 1997.
INCOME TAXES:
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
INTEREST RATE CONTRACTS:
The Company uses various interest rate contracts, such as interest rate
swaps, caps and floors, to help manage interest rate and market valuation risk
exposure, which is incurred in normal recurrent banking activities. These
interest rate contracts function as hedges against specific assets or
liabilities on the Consolidated Balance Sheet. Unrealized gains or losses on
these hedge transactions are deferred. It is the Company's policy not to
terminate hedge transactions prior to their expiration date.
For interest rate swaps, the interest differential to be paid or received
is accrued by the Company and recognized as an adjustment to interest income or
interest expense of the underlying assets or liabilities being hedged. Because
only interest payments are exchanged, the cash requirement and exposure to
credit risk are significantly less than the notional amount.
Any premium or transaction fee incurred to purchase interest rate caps or
floors is deferred and amortized to interest income or interest expense over the
term of the contract. Unamortized premiums related to the purchase of caps and
floors are included in "Other assets" on the Consolidated Balance Sheet.
RISK MANAGEMENT OVERVIEW:
Risk identification and management are essential elements for the
successful management of the Company. In the normal course of business, the
Company is subject to various types of risk, including interest rate, credit,
and liquidity risk. The Company controls and monitors these risks with policies,
procedures, and various levels of managerial and Board oversight. The Company's
objective is to optimize profitability while managing and controlling risk
within Board approved policy limits.
42
<PAGE> 44
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest rate risk is the sensitivity of net interest income and the market
value of financial instruments to the magnitude, direction, and frequency of
changes in interest rates. Interest rate risk results from various repricing
frequencies and the maturity structure of assets, liabilities, and off-balance
sheet positions. The Company uses its asset liability management policy and
hedging policy to control and manage interest rate risk.
Credit risk represents the possibility that a customer may not perform in
accordance with contractual terms. Credit risk results from extending credit to
customers, purchasing securities, and entering into certain off-balance sheet
financial instruments. The Company's primary credit risk occurs in the loan
portfolio. The Company uses its credit policy and disciplined approach to
evaluating the adequacy of the allowance for loan losses to control and manage
credit risk. The Company's investment policy and hedging policy strictly limit
the amount of credit risk that may be assumed in the investment portfolio and
through off-balance sheet activities.
Liquidity risk represents the inability to generate cash or otherwise
obtain funds at reasonable rates to satisfy commitments to borrowers, as well
as, the obligations to depositors and debtholders. The Company uses its asset
liability management policy and contingency funding plan to control and manage
liquidity risk.
FUTURE ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement #133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS #133"), which is required to be adopted in years beginning after June 15,
1999. The statement permits early adoption as of the beginning of any fiscal
quarter after its issuance. The statement will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If a derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
asset, liability, or firm commitment through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. This
statement has been amended by SFAS #137, "Accounting for Derivative Instruments
and Hedging Activity -- Deferral of the effective date of SFAS #133." SFAS #137
will be effective for years beginning after June 15, 2000. The ineffective
portions of a derivative's change in fair value will be immediately recognized
in earnings. The Company has not yet quantified the impact of adopting SFAS #133
on its financial statements and has not determined the timing of, or method of
adoption of SFAS #133. However, SFAS #133 could increase volatility in earnings
and other comprehensive income.
2. CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 1999, and 1998, included
$18,448,000 and $17,288,000, respectively, of reserves required to be maintained
under Federal Reserve Bank regulations.
3. INTEREST BEARING DEPOSITS WITH BANKS
The book value of interest bearing deposits with domestic banks are as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------
1999 1998
---- ------
(IN THOUSANDS)
<S> <C> <C>
Total..................................................... $758 $3,855
==== ======
</TABLE>
All interest bearing deposits with domestic banks mature within three
months. The Company had no deposits in foreign banks nor in foreign branches of
United States banks.
43
<PAGE> 45
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENT SECURITIES
The book and market values of investment securities are summarized as
follows:
Investment securities available for sale:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
-------------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. TREASURY................................... $ 15,855 $ 2 $ (135) $ 15,722
U.S. AGENCY..................................... 43,599 -- (2,917) 40,682
STATE AND MUNICIPAL............................. 156,256 745 (7,529) 149,472
U.S. AGENCY MORTGAGE-BACKED SECURITIES.......... 943,474 637 (43,401) 900,710
OTHER SECURITIES(1)............................. 82,568 48 (1,867) 80,749
---------- ------ -------- ----------
TOTAL........................................... $1,241,752 $1,432 $(55,849) $1,187,335
========== ====== ======== ==========
</TABLE>
- ---------------
(1) Other investment securities include corporate notes and bonds, asset-backed
securities, and equity securities.
During the second half of 1999, the Company in preparation for liquidity
needs for Year 2000 sold $16 million of mortgage backed securities that had been
purchased in 1993 through 1995 and classified as held to maturity. The Company
believed the sales were allowable under the provision of SFAS #115 which permits
the sale of held to maturity mortgage backed securities after a substantial
portion (85%) of the principal had been collected through prepayments. The
Company, however, misinterpreted this provision and computed the 85% paydown
factor against the principal outstanding at issuance as opposed to using the
principal outstanding at the point the Company purchased the securities in the
secondary market. As a result of this interpretation error, the Company tainted
its held to maturity portfolio and transferred all securities classified as held
to maturity to available for sale. The time period for the taint will be two
years. At the time of the transfer, these securities had an amortized cost of
$495.8 million and a market value of $485.4 million. Prior to the transfer,
approximately 60% of the Company's investment securities were already classified
as available for sale. With the entire portfolio now being classified as
available for sale, the Company will have greater flexibility to manage the
securities portfolio to better achieve overall balance sheet rate sensitivity
goals and provide liquidity to fund loan growth if needed. The mark to market of
the available for sale portfolio does inject more volatility in the book value
of equity but has no impact on regulatory capital.
Investment securities available for sale:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
---------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury...................................... $ 442 $ 14 $ -- $ 456
U.S. Agency........................................ 21,524 82 -- 21,606
State and municipal................................ 11,166 162 -- 11,328
U.S. Agency mortgage-backed securities............. 577,241 4,119 (673) 580,687
Other securities(1)................................ 47,409 5 -- 47,414
-------- ------ ----- --------
Total.............................................. $657,782 $4,382 $(673) $661,491
======== ====== ===== ========
</TABLE>
44
<PAGE> 46
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment securities held to maturity:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
---------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury...................................... $ 17,207 $ 86 $ (33) $ 17,260
U.S. Agency........................................ 23,928.. 371 -- 24,299
State and municipal................................ 147,628 2,816 (1,174) 149,270
U.S. Agency mortgage-backed securities............. 315,171 6,316 (196) 321,291
Other securities(1)................................ 4,208 124 -- 4,332
-------- ------ ------- --------
Total.............................................. $508,142 $9,713 $(1,403) $516,452
======== ====== ======= ========
</TABLE>
- ---------------
(1) Other investment securities include corporate notes and bonds, asset-backed
securities, and equity securities.
All purchased investment securities are recorded on settlement date which
is not materially different from the trade date. Realized gains and losses are
calculated by the specific identification method.
Maintaining investment quality is a primary objective of the Company's
investment policy which, subject to certain limited exceptions, prohibits the
purchase of any investment security below a Moody's Investors Service or
Standard & Poor's rating of "A." At December 31, 1999, 97.3% of the portfolio
was rated "AAA" as compared to 98.1% at December 31, 1998. Less than 1.5% of the
portfolio was rated below "A" or unrated on December 31, 1999.
The book value of securities pledged to secure public and trust deposits,
as required by law, was $788,622,000 at December 31, 1999, and $628,369,000 at
December 31, 1998. The Company realized $624,000 and $2,745,000 of gross
investment security gains and $525,000 and $478,000 of gross investment security
losses on available for sale securities in 1999 and 1998, respectively. The
Company realized $355,000 of gross investment security gains and $18,000 of
gross investment security losses on held to maturity securities in 1999.
The following table sets forth the contractual maturity distribution of the
investment securities, book and market values, and the weighted average yield
for each type and range of maturity as of December 31, 1999. Yields are not
presented on a tax-equivalent basis, but are based upon book value and are
weighted for the scheduled maturity. Average maturities are based upon the
original contractual maturity dates with the exception of mortgage-backed
securities and asset-backed securities for which the average lives were used. At
December 31, 1999, the Company's consolidated investment securities portfolio
had a modified duration of approximately 5.25 years.
45
<PAGE> 47
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment securities available for sale:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
------------------------------------------------------------------------------------------
AFTER 5 YEARS
AFTER 1 YEAR BUT BUT WITHIN
WITHIN 1 YEAR WITHIN 5 YEARS 10 YEARS AFTER 10 YEARS TOTAL
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------------- ----------------- --------------- --------------- -----------------
(IN THOUSANDS, EXCEPT YIELDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BOOK VALUE
U.S. TREASURY....................... $ 5,633 4.51% $ 10,222 5.59% $ -- --% $ -- --% $ 15,855 5.21%
U.S. AGENCY......................... -- -- 9,294 5.80 33,828 6.51 477 6.37 43,599 6.36
STATE AND MUNICIPAL................. 524 7.00 15,348 4.70 34,240 5.54 106,144 4.91 156,256 5.04
U.S. AGENCY MORTGAGE-BACKED
SECURITIES........................ 18,054 6.60 94,913 6.97 409,008 6.53 421,499 6.64 943,474 6.63
OTHER SECURITIES(1)................. 59,006 5.99 1,250 6.97 4,854 5.90 17,458 7.78 82,568 6.35
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----
TOTAL INVESTMENT SECURITIES
AVAILABLE FOR SALE................ $83,217 6.03% $131,027 6.51% $481,930 6.45% $545,578 6.34% $1,241,752 6.38%
======= ==== ======== ==== ======== ==== ======== ==== ========== ====
MARKET VALUE
U.S. TREASURY....................... $ 5,589 $ 10,133 $ -- $ -- $ 15,722
U.S. AGENCY......................... -- 8,856 31,375 451 40,682
STATE AND MUNICIPAL................. 527 15,329 34,384 99,232 149,472
U.S. AGENCY MORTGAGE-BACKED
SECURITIES........................ 18,020 93,991 389,401 399,298 900,710
OTHER SECURITIES(1)................. 59,054 1,250 4,819 15,626 80,749
------- -------- -------- -------- ----------
TOTAL INVESTMENT SECURITIES
AVAILABLE FOR SALE................ $83,190 $129,559 $459,979 $514,607 $1,187,335
======= ======== ======== ======== ==========
</TABLE>
- ---------------
(1) Other investment securities include corporate notes and bonds, asset-backed
securities, and equity securities.
5. LOANS
The loan portfolio of the Company consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Commercial.................................................. $ 152,042 $ 139,751
Commercial loans secured by real estate..................... 406,927 341,842
Real estate-mortgage........................................ 452,507 449,875
Consumer.................................................... 70,983 88,812
---------- ----------
Loans....................................................... 1,082,459 1,020,280
Less: Unearned income....................................... 8,408 5,276
---------- ----------
Loans, net of unearned income............................... $1,074,051 $1,015,004
========== ==========
</TABLE>
Real estate construction loans comprised 4.5% and 4.9% of total loans net
of unearned income at December 31, 1999 and 1998, respectively. The Company has
no direct credit exposure to foreign countries. Most of the Company's loan
activity is with customers located in the southwestern Pennsylvania geographic
area. As of December 31, 1999, loans to customers engaged in similar activities
and having similar economic characteristics, as defined by standard industrial
classifications, did not exceed 10% of total loans. In the ordinary course of
business, the subsidiaries have transactions, including loans, with their
officers, directors, and their affiliated companies. These transactions were on
substantially the same terms as those prevailing at the time for comparable
transactions with unaffiliated parties and do not involve more than the normal
credit
46
<PAGE> 48
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
risk. These loans totaled $4,779,000 and $2,285,000 at December 31, 1999 and
1998, respectively. An analysis of these related party loans follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Balance January 1........................................... $ 2,285 $ 2,014
New loans................................................... 16,178 2,720
Payments.................................................... (13,684) (2,449)
-------- -------
Balance December 31......................................... $ 4,779 $ 2,285
======== =======
</TABLE>
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance January 1........................................... $10,725 $12,113 $13,329
Provision for loan losses................................... 1,900 600 158
Recoveries on loans previously charged-off.................. 728 530 1,123
Loans charged-off........................................... (3,003) (2,518) (2,497)
------- ------- ------- ---
Balance December 31......................................... $10,350 $10,725 $12,113
======= ======= ======= ===
</TABLE>
7. NON-PERFORMING ASSETS
Non-performing assets are comprised of (i) loans which are on a non-accrual
basis, (ii) loans which are contractually past due 90 days or more as to
interest or principal payments some of which are insured for credit loss, and
(iii) other real estate owned (real estate acquired through foreclosure and
in-substance foreclosures).
The following table presents information concerning non-performing assets:
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Non-accrual loans................................ $ 4,928 $5,206 $6,450 $6,365 $7,517
Loans past due 90 days or more................... 1,305 1,579 1,601 2,043 995
Other real estate owned.......................... 7,126 1,451 807 263 914
------- ------ ------ ------ ------
Total non-performing assets...................... $13,359 $8,236 $8,858 $8,671 $9,426
Total non-performing assets as a percent of loans
and loans held for sale, net of unearned
income, and other real estate owned............ 1.21% 0.77% 0.89% 0.92% 1.31%
======= ====== ====== ====== ======
</TABLE>
The Company is unaware of any additional loans which are required to either
be charged-off or added to the non-performing asset totals disclosed above.
Other real estate owned is recorded at the lower of 1) fair value minus
estimated costs to sell, or 2) carrying cost.
For impaired loans, the measurement of impairment may be based upon: 1) the
present value of expected future cash flows discounted at the loan's effective
interest rate; 2) the observable market price of the impaired loan; or 3) the
fair value of the collateral of a collateral dependent loan.
47
<PAGE> 49
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had loans totalling $,2,169,000 and $1,759,000 being
specifically identified as impaired and a corresponding allocation reserve of
$49,000 and $375,000 at December 31, 1999 and 1998, respectively. The average
outstanding balance for loans being specifically identified as impaired was
$4,610,000 for 1999 and $1,519,000 for 1998. All of the impaired loans are
collateral dependent, therefore the fair value of the collateral of the impaired
loans is evaluated in measuring the impairment. There was no interest income
recognized on impaired loans during 1999 or 1998.
The following table sets forth, for the periods indicated, (i) the gross
interest income that would have been recorded if non-accrual loans had been
current in accordance with their original terms and had been outstanding
throughout the period or since origination if held for part of the period, (ii)
the amount of interest income actually recorded on such loans, and (iii) the net
reduction in interest income attributable to such loans.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997 1996 1995
---- ----- ----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income due in accordance with original
terms............................................ $494 $ 367 $ 472 $560 $ 601
Interest income recorded........................... (20) (134) (132) (75) (648)
---- ----- ----- ---- -----
Net reduction (increase) in interest income........ $474 $ 233 $ 340 $485 $ (47)
==== ===== ===== ==== =====
</TABLE>
8. PREMISES AND EQUIPMENT
An analysis of premises and equipment follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 2,131 $ 2,131
Premises.................................................... 26,730 24,822
Furniture and equipment..................................... 22,052 20,429
Leasehold improvements...................................... 2,709 2,667
------- -------
Total at cost............................................... 53,622 50,049
Less: Accumulated depreciation.............................. 34,685 32,029
------- -------
Net book value.............................................. $18,937 $18,020
======= =======
</TABLE>
48
<PAGE> 50
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, AND
OTHER SHORT-TERM BORROWINGS
The outstanding balances and related information for federal funds
purchased, securities sold under agreements to repurchase, and other short-term
borrowings are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
----------------------------------------
SECURITIES OTHER
FEDERAL SOLD UNDER SHORT-
FUNDS AGREEMENTS TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
<S> <C> <C> <C>
BALANCE.................................................. $15,300 $ 1,069 $ 84,874
MAXIMUM INDEBTEDNESS AT ANY MONTH END.................... 65,600 37,087 218,204
AVERAGE BALANCE DURING YEAR.............................. 56,396 10,548 148,668
AVERAGE RATE PAID FOR THE YEAR........................... 5.13% 4.69% 4.99%
AVERAGE RATE ON PERIOD END BALANCE....................... 4.75 3.00 3.07
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS SHORT-TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
<S> <C> <C> <C>
Balance.................................................. $63,705 $37,700 $129,003
Maximum indebtedness at any month end.................... 65,900 41,602 191,835
Average balance during year.............................. 51,112 39,224 98,988
Average rate paid for the year........................... 5.51% 5.41% 4.84%
Average rate on period end balance....................... 5.58 5.16 3.44
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------------------
SECURITIES
FEDERAL SOLD UNDER OTHER
FUNDS AGREEMENTS SHORT-TERM
PURCHASED TO REPURCHASE BORROWINGS
--------- ------------- ----------
(IN THOUSANDS, EXCEPT RATES)
<S> <C> <C> <C>
Balance.................................................. $52,800 $40,029 $ 57,892
Maximum indebtedness at any month end.................... 58,651 71,888 106,408
Average balance during year.............................. 37,632 51,621 67,246
Average rate paid for the year........................... 5.60% 5.56% 4.76%
Average rate on period end balance....................... 6.43 5.54 5.35
======= ======= ========
</TABLE>
Average amounts outstanding during the year represent daily averages.
Average interest rates represent interest expense divided by the related average
balances. Collateral related to securities sold under agreements to repurchase
are maintained within the Company's investment portfolio. Included in the above
borrowings is a $33,499,000 outstanding balance on a $100 million mortgage
warehouse line of credit at Standard Mortgage Corporation (a mortgage banking
subsidiary of Three Rivers Bank). This line of credit bears interest at a rate
between 1.00% and 1.35% on the used portion for which a compensating balance is
maintained and Libor plus 1.35% on the used portion for which no compensating
balance is maintained. This line of credit, which expires May 7, 2000, is
secured by Standard Mortgage Corporation's inventory, servicing rights, and
commitments.
Compensating balances held by the lender are used in determining the
interest rates charged on the mortgage warehouse lines of credit and a bank note
(discussed in Note #11). These balances, which are derived from customer escrow
balances, amounts of collections in transit on loans serviced and corporate cash
49
<PAGE> 51
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
balances, can further decrease the interest rate charged on the line of credit
if the compensating balance is maintained at a level greater than the used
portion of the line.
These borrowing transactions range from overnight to one year in maturity.
The average maturity was 87 days at the end of 1999, 62 days at the end of 1998
and 80 days at the end of 1997.
10. DEPOSITS
The following table sets forth the balance of the Company's deposits:
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Demand:
Non-interest bearing................................... $ 160,253 $ 166,701 $ 146,685
Interest bearing....................................... 88,661 92,060 89,082
Savings................................................ 162,653 167,167 174,459
Money market........................................... 177,935 172,807 159,505
Certificates of deposit in denominations of $100,000 or
more................................................. 90,921 39,443 37,651
Other time............................................. 550,518 538,113 532,145
---------- ---------- ----------
Total deposits......................................... $1,230,941 $1,176,291 $1,139,527
========== ========== ==========
</TABLE>
Interest expense on deposits consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest bearing demand..................................... $ 928 $ 889 $ 891
Savings..................................................... 2,799 2,617 3,139
Money market................................................ 6,302 6,041 5,689
Certificates of deposit in denominations of $100,000 or
more...................................................... 2,596 2,323 2,312
Other time.................................................. 28,525 29,021 30,541
------- ------- -------
Total interest expense...................................... $41,150 $40,891 $42,572
======= ======= =======
</TABLE>
The following table sets forth the balance of other time deposits maturing
in the periods presented:
<TABLE>
<CAPTION>
YEAR
- ---- (IN THOUSANDS)
<S> <C>
2000........................................................ $342,816
2001........................................................ 105,350
2002........................................................ 46,990
2003........................................................ 14,153
2004 and after.............................................. 41,209
========
</TABLE>
50
<PAGE> 52
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. ADVANCES FROM FEDERAL HOME LOAN BANK, GUARANTEED JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES AND LONG-TERM DEBT
Advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------------
WEIGHTED
MATURING AVERAGE YIELD BALANCE
- -------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Overnight................................................... 4.06% $ 45,375
2000........................................................ 5.25 758,750
2001........................................................ 8.22 10,126
2002........................................................ 5.84 183,500
2003........................................................ 6.61 3,750
2004 and after.............................................. 6.71 873
---- ----------
Total advances.............................................. 5.40 956,999
---- ----------
Total FHLB Borrowings....................................... 5.34% $1,002,374
==== ==========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------------
WEIGHTED
MATURING AVERAGE YIELD BALANCE
- -------- ------------- --------
(IN THOUSANDS)
<S> <C> <C>
1999........................................................ 5.34% $221,260
2000........................................................ 6.15 3,755
2001........................................................ 8.22 10,126
2002........................................................ 5.72 258,500
2003........................................................ 5.11 218,750
2004 and after.............................................. 4.66 40,000
---- --------
Total FHLB Borrowings....................................... 5.41% $752,391
==== ========
</TABLE>
Total Federal Home Loan Bank borrowings consist of $611,999,000 and
$532,391,000 of term advances and $390,375,000 and $220,000,000 of repo plus
advances with maturities of less than 90 days for 1999 and 1998, respectively.
All Federal Home Loan Bank stock, along with an interest in unspecified mortgage
loans and mortgage-backed securities, with an aggregate statutory value equal to
the amount of the advances, have been pledged as collateral to the Federal Home
Loan Bank of Pittsburgh.
GUARANTEED JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES:
On April 28, 1998, the Company completed a $34.5 million public offering of
8.45% Trust Preferred Securities, which represent undivided beneficial interests
in the assets of a Delaware business trust, USBANCORP Capital Trust I. The Trust
Preferred Securities will mature on September 30, 2028, and are callable at par
at the option of the Company after September 30, 2003. Proceeds of the issue
were invested by USBANCORP Capital Trust I in Junior Subordinated Debentures
issued by USBANCORP, Inc. Net proceeds from the $34.5 million offering were used
for general corporate purposes, including the repayment of debt, the repurchase
of USBANCORP common stock, and investments in and advances to the Company's
subsidiaries. Unamortized deferred issuance costs associated with the Trust
Preferred Securities amounted to $1.3 million as of December 31, 1999, and are
being amortized on a straight line basis over the term of the issue. The Trust
Preferred securities are listed on NASDAQ under the symbol "UBANP."
51
<PAGE> 53
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon the occurrence of certain events, specifically a tax event or a
capital treatment event, the Company may redeem in whole, but not in part, the
Guaranteed Junior Subordinated Deferrable Interest Debentures prior to September
30, 2028. A tax event basically means that the interest paid by the Company on
the subordinated debentures will no longer be deductible for federal income tax
purposes. A capital treatment event means that the Trust Preferred Securities no
longer qualify as Tier 1 capital for purposes of the capital adequacy guidelines
of the Federal Reserve. Proceeds from any redemption of the subordinated
debentures would cause mandatory redemption of the Trust Preferred Securities.
LONG-TERM DEBT:
The Company's long-term debt consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Bank note................................................... $4,688 $6,563
Collateralized mortgage obligation.......................... 1,582 2,511
Other....................................................... 830 197
------ ------
Total long-term debt........................................ $7,100 $9,271
====== ======
</TABLE>
The bank note payable by Standard Mortgage Corporation is a $7.5 million
non-revolving commercial loan commitment which is payable monthly in fixed
principal installments of $156,250 through June 25, 2002. This note replaces all
previous loans incurred by Standard Mortgage Corporation of Georgia.
The collateralized mortgage obligation was issued through Community First
Capital Corporation ("CFCC"), a wholly-owned, single-purpose finance subsidiary
of Three Rivers Bank. In 1988, Three Rivers Bank transferred Federal Home Loan
Mortgage Corporation ("FHLMC") securities with a book value of approximately
$31,500,000 to CFCC which then collateralized the issuance of bonds with a par
value of $27,787,000.
Scheduled maturities of long-term debt for the years subsequent to December
31, 1999, are $2,069,000 in 2000; $2,037,000 in 2001; $1,038,000 in 2002;
$111,000 in 2003; and $1,845,000 in 2003 and thereafter.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS #107, "Disclosures about Fair Value of Financial Instruments,"
requires all entities to disclose the estimated fair value of its financial
instrument assets and liabilities. For the Company, as for most financial
institutions, approximately 95% of its assets and liabilities are considered
financial instruments. Many of the Company's financial instruments, however,
lack an available trading market characterized by a willing buyer and willing
seller engaging in an exchange transaction. Therefore, significant estimations
and present value calculations were used by the Company for the purpose of this
disclosure.
Estimated fair values have been determined by the Company using the best
available data and an estimation methodology suitable for each category of
financial instruments. Management believes that cash, cash equivalents, and
loans and deposits with floating interest rates have estimated fair values which
approximate the recorded book balances. The estimation methodologies used, the
estimated fair values, and recorded book balances at December 31, 1999 and 1998,
were as follows:
Financial instruments actively traded in a secondary market have been
valued using quoted available market prices.
52
<PAGE> 54
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities.................... $1,187,335 $1,187,335 $1,185,563 $1,173,384
========== ========== ========== ==========
</TABLE>
Financial instruments with stated maturities have been valued using a
present value discounted cash flow with a discount rate approximating current
market for similar assets and liabilities.
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits with stated maturities............. $596,678 $641,439 $540,813 $577,556
Short-term borrowings....................... 646,744 646,744 553,213 553,213
All other borrowings........................ 452,909 453,098 473,563 473,357
======== ======== ======== ========
</TABLE>
Financial instrument liabilities with no stated maturities have an
estimated fair value equal to both the amount payable on demand and the recorded
book balance.
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits with no stated maturities.......... $589,502 $589,502 $598,735 $598,735
======== ======== ======== ========
</TABLE>
The net loan portfolio has been valued using a present value discounted
cash flow. The discount rate used in these calculations is based upon the
treasury yield curve adjusted for non-interest operating costs, credit loss, and
assumed prepayment risk.
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loans (including loans held for
sale).................................. $1,091,552 $1,095,804 $1,071,514 $1,066,321
========== ========== ========== ==========
</TABLE>
Purchased and originated mortgage servicing rights have been valued by an
independent third party using a methodology which incorporates a discounted
after-tax cash flow of the servicing (loan servicing fees and other related
ancillary fee income less the costs of servicing the loans). This valuation also
assumes current PSA prepayment speeds which are based upon industry data
collected on mortgage prepayment trends. For further discussion see Note #1.
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE FAIR VALUE BOOK BALANCE
---------- ------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Purchased and originated mortgage servicing
rights.................................... $14,190 $13,510 $16,447 $16,197
======= ======= ======= =======
</TABLE>
Changes in assumptions or estimation methodologies may have a material
effect on these estimated fair values. The Company's remaining assets and
liabilities which are not considered financial instruments have not been valued
differently than has been customary with historical cost accounting. No
disclosure of the relationship value of the Company's deposits is required by
SFAS #107, however, management believes the relationship value of these core
deposits is significant. Based upon the Company's most recent acquisitions and
other limited secondary market transactions involving similar deposits,
management estimates the relationship
53
<PAGE> 55
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of these funding liabilities to range between $87 million to $137 million
less than their estimated fair value shown at December 31, 1999. The estimated
fair value of off-balance sheet financial instruments, used for hedging
purposes, is estimated by obtaining quotes from brokers. These values represent
the estimated amount the Company would receive or pay, to terminate the
agreements, considering current interest rates, as well as the creditworthiness
of the counterparties. At December 31, 1999, the notional value of the Company's
off-balance sheet financial instruments (interest rate swaps and cap) totalled
$390 million with an estimated fair value of approximately $905,000. There is no
material difference between the notional amount and the estimated fair value of
the remaining off-balance sheet items which total $240.3 million and are
primarily comprised of unfunded loan commitments which are generally priced at
market at the time of funding.
Management believes that reasonable comparability of these disclosed fair
values between financial institutions may not be likely due to the wide range of
permitted valuation techniques and numerous estimates which must be made given
the absence of active secondary markets for many of the financial instruments.
This lack of uniform valuation methodologies also introduces a greater degree of
subjectivity to these estimated fair values.
13. INCOME TAXES
The provision for federal income taxes is summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current..................................................... $5,403 $6,023 $7,913
Deferred.................................................... 1,519 1,632 1,390
------ ------ ------
Income tax provision........................................ $6,922 $7,655 $9,303
====== ====== ======
</TABLE>
The reconciliation between the federal statutory tax rate and the Company's
effective consolidated income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- ----- ------- ----- ------- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Tax expense based on federal
statutory rate..................... $ 9,570 35.0% $10,079 35.0% $11,480 35.0%
State income taxes................... 13 0.1 39 0.1 234 0.7
Tax exempt income.................... (3,359) (12.3) (3,069) (10.7) (3,104) (9.5)
Goodwill and acquisition related
costs.............................. 469 1.7 469 1.6 575 1.8
Other................................ 229 0.8 137 0.6 118 0.3
------- ----- ------- ----- ------- -----
Total provision for income taxes..... $ 6,922 25.3% $ 7,655 26.6% $ 9,303 28.3%
======= ===== ======= ===== ======= =====
</TABLE>
54
<PAGE> 56
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes result from temporary differences in the recognition
of revenue and expense for tax and financial reporting purposes. The following
table presents the impact on income tax expense of the principal timing
differences and the tax effect of each:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for possible loan losses.......................... $ 131 $ 486 $ 425
Lease accounting............................................ 1,356 769 999
Accretion of discounts on securities, net................... 506 299 366
Investment write-downs...................................... -- -- 83
Core deposit and mortgage servicing intangibles............. (351) 106 (289)
Deposit liability write-down................................ -- -- (345)
Deferred loan fees.......................................... 89 82 82
Other, net.................................................. (212) (110) 69
------ ------ ------
Total............................................. $1,519 $1,632 $1,390
====== ====== ======
</TABLE>
At December 31, 1999 and 1998, deferred taxes are included in the
accompanying consolidated balance sheet. The following table highlights the
major components comprising the deferred tax assets and liabilities for each of
the periods presented:
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred Assets:
Provision for loan losses................................. $ 3,623 $ 3,754
Investment security write-downs due to SFAS #115.......... 19,046 --
Deferred loan fees........................................ 320 409
Other..................................................... 603 426
-------- --------
Total assets...................................... 23,592 4,589
Deferred Liabilities:
Investment security write-ups due to SFAS #115............ -- (1,307)
Accumulated depreciation.................................. (534) (705)
Accretion of discount..................................... (3,418) (2,912)
Lease accounting.......................................... (4,700) (3,344)
Core deposit and mortgage servicing intangibles........... (1,897) (2,248)
Other..................................................... (405) (269)
-------- --------
Total liabilities................................. (10,954) (10,785)
Valuation allowance......................................... (325) (325)
-------- --------
Net deferred asset (liability).............................. $ 12,313 $ (6,521)
======== ========
</TABLE>
55
<PAGE> 57
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The change in the net deferred asset (liability) during 1999 and 1998 was
attributed to the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Investment write-downs (ups) due to SFAS #115, charge to
equity.................................................... $20,353 $ (331)
Deferred provision for income taxes......................... (1,519) (1,632)
------- -------
Net increase (decrease)..................................... $18,834 $(1,963)
======= =======
</TABLE>
14. PENSION AND PROFIT SHARING PLANS
The Company has trusteed, noncontributory defined benefit pension plans
covering all employees who work at least 1,000 hours per year and who have not
yet reached age 60 at their employment date. The benefits of the plans are based
upon the employee's years of service and average annual earnings for the highest
five consecutive calendar years during the final ten year period of employment.
The Company's funding policy has been to contribute annually an amount within
the statutory range of allowable minimum and maximum actuarially determined
tax-deductible contributions. Plan assets are primarily debt securities
(including U.S. Agency and Treasury securities, corporate notes and bonds),
listed common stocks (including shares of USBANCORP, Inc. common stock), mutual
funds, and short-term cash equivalent instruments.
Pension Benefits:
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------
1999 1998
-------- --------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year..................... $14,661 $12,740
Service cost................................................ 1,283 1,128
Interest cost............................................... 1,023 911
Deferred asset (loss) gain.................................. (1,376) 1,077
Benefits paid............................................... (1,484) (1,114)
Expenses paid............................................... (73) (81)
------- -------
Benefit obligation at end of year........................... $14,034 $14,661
======= =======
Change in plan assets
Fair value of plan assets at beginning of year.............. $14,323 $12,343
Actual return on plan assets................................ 142 1,376
Employer contributions...................................... 1,534 1,799
Benefits paid............................................... (1,484) (1,114)
Expenses paid............................................... (73) (81)
------- -------
Fair value of plan assets at end of year.................... $14,442 $14,323
======= =======
</TABLE>
56
<PAGE> 58
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------
1999 1998
-------- --------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
<S> <C> <C>
Funded status of the plan overfunded (underfunded).......... $ 408 $ (338)
Unrecognized transition asset............................... (219) (232)
Unrecognized prior service cost............................. 113 140
Unrecognized actuarial (gain)loss........................... (151) 176
------- -------
Net prepaid (accrued) benefit cost.......................... $ 151 $ (254)
======= =======
Components of net periodic benefit cost
Service cost................................................ $ 1,283 $ 1,128
Interest cost............................................... 1,023 911
Expected return on plan assets.............................. (1,194) (1,033)
Amortization of prior year service cost..................... (14) (14)
Amortization of transition asset............................ 27 27
Recognized net actuarial losses............................. 2 --
------- -------
Net periodic benefit cost................................... $ 1,127 $ 1,019
======= =======
Weighted-average assumptions
Discount rate............................................... 7.50% 6.75%
Expected return on plan assets.............................. 8.00 8.00
Rate of compensation increase............................... 3.50 3.50
======= =======
</TABLE>
In addition, U.S. Bank has a trusteed, deferred profit sharing plan with
contributions made by U.S. Bank based upon income as defined by the plan. All
employees of U.S. Bank and the Company who work over 1,000 hours per year
participate in the plan beginning on January 1 following six months of service.
Contributions to this profit sharing plan were $1,122,000 in 1999 and $1,010,000
in 1998. Plan assets are primarily debt securities (including U.S. Agency and
Treasury securities, corporate notes and bonds), listed common stocks (including
shares of USBANCORP, Inc. common stock), mutual funds, and short-term cash
equivalent instruments.
Three Rivers Bank also has a trusteed 401(k) plan with contributions made
by Three Rivers Bank matching those by eligible employees up to a maximum of 50%
of the first 6% of their annual salary. All employees of Three Rivers Bank who
work over 1,000 hours per year are eligible to participate in the plan on
January 1 following six months of service. Three Rivers Bank's contribution to
this 410(k) plan was $207,000 in 1999 and $199,000 in 1998.
Except for the above pension benefits, the Company has no significant
additional exposure for any other post-retirement benefits.
57
<PAGE> 59
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. LEASE COMMITMENTS
The Company's obligation for future minimum lease payments on operating
leases at December 31, 1999, is as follows:
<TABLE>
<CAPTION>
YEAR FUTURE MINIMUM LEASE PAYMENTS (IN THOUSANDS)
<S> <C>
2000........................................................ $1,791
2001........................................................ 1,567
2002........................................................ 1,422
2003........................................................ 813
2004 and thereafter (in total).............................. 1,835
======
</TABLE>
In addition to the amounts set forth above, certain of the leases require
payments by the Company for taxes, insurance, and maintenance.
Rent expense included in total non-interest expense amounted to $634,000,
$868,000 and $782,000, in 1999, 1998, and 1997, respectively.
16. COMMITMENTS AND CONTINGENT LIABILITIES
The Company's banking subsidiaries incur off-balance sheet risks in the
normal course of business in order to meet the financing needs of their
customers. These risks derive from commitments to extend credit and standby
letters of credit. Such commitments and standby letters of credit involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the consolidated financial statements. Commitments to extend credit are
obligations to lend to a customer as long as there is no violation of any
condition established in the loan agreement. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Because many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The banking subsidiaries evaluate each customer's creditworthiness
on a case-by-case basis. Collateral which secures these types of commitments is
the same as for other types of secured lending such as accounts receivable,
inventory, and fixed assets.
Standby letters of credit are conditional commitments issued by the banking
subsidiaries to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including normal business activities, bond financings, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers. Letters
of credit are issued both on an unsecured and secured basis. Collateral securing
these types of transactions is similar to collateral securing the subsidiary
banks' commercial loans.
The Company's exposure to credit loss in the event of nonperformance by the
other party to these commitments to extend credit and standby letters of credit
is represented by their contractual amounts. The banking subsidiaries use the
same credit and collateral policies in making commitments and conditional
obligations as for all other lending. The Company had outstanding various
commitments to extend credit approximating $240,331,000 and standby letters of
credit of $22,736,000 as of December 31, 1999.
Additionally, the Company is also subject to a number of asserted and
unasserted potential claims encountered in the normal course of business. In the
opinion of management and legal counsel, neither the resolution of these claims
nor the funding of these credit commitments will have a material adverse effect
on the Company's consolidated financial position or results of operation.
58
<PAGE> 60
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. STOCK COMPENSATION PLANS
In 1991, the Company's Board of Directors adopted an Incentive Stock Option
Plan authorizing the grant of options covering 384,000 shares of common stock.
In April 1995 and in April 1998, the Company amended the Plan to increase the
number of shares available for issuance thereunder which presently stands at
1,455,000 shares. Under the Plan, options can be granted (the "Grant Date") to
employees with executive, managerial, technical, or professional responsibility,
as selected by a committee of the Board of Directors. The Company accounts for
this Plan under APB Opinion #25, "Accounting for Stock Issued to Employees." The
option price at which a stock option may be exercised shall be not less than
100% of the fair market value per share of common stock on the Grant Date. The
maximum term of any option granted under the Plan cannot exceed 10 years.
Generally, under the Plan on or after the first anniversary of the Grant Date,
one-third of such options may be exercised. On or after the second anniversary
of the Grant Date, two-thirds of such options may be exercised minus the
aggregate number of such options previously exercised. On or after the third
anniversary of the Grant Date, the remainder of the options may be exercised.
Had compensation cost for these plans been determined consistent with SFAS #123,
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have changed to the following pro forma amounts:
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income:
As reported............................................... $20,421 $21,144 $23,497
Pro forma................................................. 20,381 20,468 23,285
Basic earnings per share:
As reported............................................... 1.53 1.51 1.56
Pro forma................................................. 1.53 1.46 1.55
Diluted earnings per share:
As reported............................................... 1.52 1.48 1.54
Pro forma................................................. 1.52 1.44 1.52
======= ======= =======
</TABLE>
Because SFAS #123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
A summary of the status of the Company's Stock Option Plan at December 31,
1999, 1998, and 1997, and changes during the years then ended is presented in
the table and narrative following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year............................ 445,903 $11.09 559,038 $11.35 525,774 $ 9.37
Granted........................... 9,100 17.22 15,600 26.30 88,500 21.13
Exercised......................... (56,170) 7.85 (70,232) 8.35 (55,236) 8.18
Forfeited......................... (29,502) 10.21 (58,503) 20.89 -- --
Outstanding at end of year........ 369,331 10.71 445,903 11.09 559,038 11.35
Exercisable at end of year........ 347,034 10.05 349,303 10.44 272,997 8.90
Weighted average fair value of
options granted since 1-1-95.... $ 7.03 $ 7.86 $ 8.88
====== ====== ======
</TABLE>
59
<PAGE> 61
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A total of 347,034 of the 369,331 options outstanding at December 31, 1999,
have exercise prices between $5.75 and $26.65, with a weighted average exercise
price of $10.05 and a weighted average remaining contractual life of 5.5 years.
All of these options are exercisable. The remaining 22,297 options have exercise
prices between $14.32 and $26.65, with a weighted average exercise price of
$21.10 and a weighted average remaining contractual life of 8.6 years. During
1999 two option grants totalling 9,100 shares were issued, in 1998 two option
grants totalling 15,600 shares were issued, compared to two option grant
totalling 88,500 shares in 1997. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for grants in 1999, 1998, and 1997, respectively:
risk-free interest rates of 5.29% and 4.49% for 1999 options, 5.53% and 5.43%
for 1998 options, and 6.49% and 5.92% for the 1997 options; expected dividend
yields of 3.75% and 3.00% for 1999 options, 2.50% for 1998 options, and 3.25%
and 2.25% for the 1997 options: expected lives of 7.0 years for all the 1999,
1998, and 1997 options; expected volatility of 23.00% and 21.69% for 1999
options, 18.81% and 18.85% for 1998 options, and 20.96% and 18.31% for the 1997
options.
In January 1998, the Company granted restricted stock awards for a total of
16,500 shares to certain executive officers. The restricted stock grants will
accumulate dividends and vest at the rate of one-third of the total balance in
January 1999, one-half of the remaining balance in January 2000 and the
remaining balance in January 2001. The recipients must continue employment
through the vesting period to be eligible for each successive award. The expense
associated with these restricted stock awards is included in compensation
expense.
18. DIVIDEND REINVESTMENT PLAN
The Company's Dividend Reinvestment and Common Stock Purchase Plan provides
each record holder of Common Stock with a simple and convenient method of
purchasing additional shares without payment of any brokerage commissions,
service charges or other similar expense. A participant in the Plan may purchase
shares of Common Stock by electing either to (1) reinvest dividends on all of
his or her shares of Common Stock or (2) make optional cash payments of not less
than $10 and up to a maximum of $2,000 per month and continue to receive regular
dividend payments on his or her other shares. A participant may withdraw from
the Plan at any time.
In the case of purchases from USBANCORP, Inc. of treasury or newly-issued
shares of Common Stock, the average market price is determined by averaging the
high and low sale price of the Common Stock as reported on the NASDAQ on the
relevant investment date. At December 31, 1999, the Company had 789,144 unissued
reserved shares available under the Plan. In the case of purchases of shares of
Common Stock on the open market, the average market price will be the weighted
average purchase price of shares purchased for the Plan in the market for the
relevant investment date.
19. SHAREHOLDER RIGHTS PLAN
Each share of the Company's Common Stock had attached to it one right (a
"Right") issued pursuant to a Shareholder Protection Rights Agreement, dated
November 10, 1989 (the "Rights Agreement"). Each Right entitled a holder to buy
one-tenth of a share of the Company's Series B Preferred Stock at a price of
$13.33, subject to adjustment (the "Exercise Price"). The Rights became
exercisable if a person, group, or other entity acquired or announced a tender
offer for 20% or more of the Company's Common Stock. They could also have been
exercised if a person or group who had become a beneficial owner of at least 10%
of the Company's Common Stock was declared by the Board of Directors to be an
"adverse person" (as defined in the Rights Agreement). Under the Rights
Agreement, any person, group, or entity would be deemed a beneficial owner of
the Company's Common Stock if such person, group, or entity would be deemed to
beneficially own the Company's Common Stock under the rules of the Securities
and Exchange Commission which generally require that such person, group, or
entity have, or have the right to acquire within sixty days,
60
<PAGE> 62
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
voting or dispositive power of the Company's Common Stock; provided, however,
that the Rights Agreement excluded from the definition of beneficial owner,
holders of revocable proxies, employee benefit plans of the Company or its
subsidiaries and the Trust Company. After the Rights became exercisable, the
Rights (other than rights held by a 20% beneficial owner or an "adverse person")
would entitle the holders to purchase, under certain circumstances, either the
Company's Common Stock or common stock of the potential acquirer having a value
equal to twice the Exercise Price. The Company was generally entitled to redeem
the Rights at $0.0033 per Right at any time until the twentieth business day
following public announcement that a 20% position had been acquired or the Board
of Directors had designated a holder of the Company's Common Stock an adverse
person. The Rights Agreement expired on November 10, 1994. On February 24, 1995,
the Company's Board of Directors adopted a Shareholder Rights Plan which is
substantially similar to and replaces the previous Rights Agreement which
expired on November 10, 1994. The only significant difference from the previous
Rights Agreement is that under the new plan each right will initially entitle
shareholders to buy one unit of a newly authorized series of junior
participating preferred stock at an exercise price of $21.67. The rights
attached to shares of USBANCORP Common Stock outstanding on March 15, 1995, and
will expire in ten years.
20. GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS
USBANCORP's balance sheet shows both tangible assets (such as loans,
buildings, and investments) and intangible assets (such as goodwill). The
Company now carries $12.4 million of goodwill and $13.3 million of core deposit
intangible assets on its balance sheet. The majority of these intangible assets
came from the 1994 Johnstown Savings Bank acquisition, the 1998 acquisition of
two National City Branch offices in Allegheny County with $27 million in
deposits, and the 1999 acquisition of three First Western Branches with $91
million in deposits.
The Company is amortizing core deposit intangibles over periods ranging
from five to ten years while goodwill is being amortized over a 15 year life.
The straight-line method of amortization is being used for both of these
categories of intangibles. The amortization expense of these intangible assets
reduced 1999 diluted earnings per share by $0.20. It is important to note that
this intangible amortization expense is not a future cash outflow. The following
table reflects the future amortization expense of the intangible assets:
<TABLE>
<CAPTION>
YEAR EXPENSE
- ------------ (IN THOUSANDS)
<S> <C>
2000........................................................ $ 3,151
2001........................................................ 3,112
2002........................................................ 3,112
2003........................................................ 3,112
2004 and after.............................................. 13,168
=======
</TABLE>
A reconciliation of the Company's intangible asset balances for 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Balance January 1........................................... $18,697 $19,122
Additions due to branch acquisitions........................ 10,093 1,883
Amortization expense........................................ (3,135) (2,308)
------- -------
Balance December 31......................................... $25,655 $18,697
======= =======
</TABLE>
Goodwill and other intangible assets are reviewed for possible impairment
at a minimum annually, or more frequently, if events or changed circumstances
may affect the underlying basis of the asset. The
61
<PAGE> 63
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company uses an estimate of the subsidiary bank's undiscounted future earnings
over the remaining life of the goodwill and other intangibles in measuring
whether these assets are recoverable.
21. OFF-BALANCE SHEET HEDGE INSTRUMENTS
The Company uses various interest rate contracts, such as interest rate
swaps, caps and floors, to help manage interest rate and market valuation risk
exposure, which is incurred in normal recurrent banking activities. A summary of
the Company's off-balance sheet derivative transactions are as follows:
BORROWED FUNDS HEDGES:
The Company had entered into several interest rate swaps to hedge
short-term borrowings used to leverage the balance sheet. Specifically, FHLB
advances which reprice between 30 days and two years are being used to fund
fixed-rate agency mortgage-backed securities with durations ranging from three
to five years. Under these swap agreements, the Company pays a fixed-rate of
interest and receives a floating-rate which resets either monthly or quarterly.
For the $120 million interest rate cap, the Company only receives payment from
the counterparty if the federal funds rate goes above the 5.00% strike rate. The
following table summarizes the interest rate swap and cap transactions which
impacted the Company's 1999 performance:
<TABLE>
<CAPTION>
IMPACT
FIXED FLOATING ON
NOTIONAL START TERMINATION RATE RATE REPRICING INTEREST
AMOUNT DATE DATE PAID RECEIVED FREQUENCY EXPENSE
- ------------ -------- ----------- ----- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 40,000,000 3-17-97 3-15-99 6.19% 5.60% Expired $ 88,958
50,000,000 5-08-97 5-10-99 6.20 5.59 Expired 138,903
25,000,000 6-20-97 6-20-99 5.96 5.36 Expired 148,499
50,000,000 9-25-97 9-25-99 5.80 5.36 Expired 354,834
130,000,000 10-25-99 10-25-00 6.17 6.22 Quarterly 13,079
90,000,000 10-25-99 10-25-01 6.41 6.22 Quarterly 32,252
50,000,000 10-25-99 10-25-01 6.42 6.22 Quarterly 18,180
120,000,000 5-1-99 4-30-00 5.00 5.25 Monthly (44,865)
--------
$749,840
========
</TABLE>
The Company believes that its exposure to credit loss in the event of
non-performance by any of the counterparties (which include Mellon Bank and
First Union) in the interest rate swap agreements is remote. The Company
monitors and controls all off-balance sheet derivative products with a
comprehensive Board of Director approved hedging policy. This policy permits a
total maximum notional amount outstanding of $500 million for interest rate
swaps, and interest rate caps/floors. The Company had no interest rate floors
outstanding at any time during the years ended December 31, 1999, or December
31, 1998.
22. SEGMENT RESULTS
The financial performance of USBANCORP is also monitored by an internal
funds transfer pricing profitability measurement system which produces line of
business results and key performance measures. USBANCORP's major business units
include community banking, mortgage banking, trust, and investment/ parent. The
reported results reflect the underlying economics of the business segments.
Expenses for centrally provided services are allocated based upon the cost and
estimated usage of those services. Capital has been allocated among the
businesses on a risk-adjusted basis. The businesses are match-funded and
interest rate risk is centrally managed and accounted for within the
investment/parent business segment. The key performance measures the Company
focuses on for each business segment are net income and risk-adjusted
62
<PAGE> 64
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
return on equity. The contribution of the major business segments to the
consolidated results for the past two years is summarized in the following
table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------
MORTGAGE
COMMUNITY BANKING BANKING TRUST INVESTMENT/ PARENT
----------------------- ----------------- --------------- -----------------------
1999 1998 1999 1998 1999 1998 1999 1998
---------- ---------- ------- ------- ------ ------ ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income......... $ 48,092 $ 49,566 $ 1,163 $ 1,448 $ 126 $ (64) $ 14,403 $ 13,680
Non-interest income......... 12,341 10,119 5,865 6,572 5,271 4,444 897 2,554
Non-interest expense........ 47,344 46,046 7,045 7,599 4,004 3,340 2,422 2,535
---------- ---------- ------- ------- ------ ------ ---------- ----------
Income before income
taxes...................... 13,089 13,639 (17) 421 1,393 1,040 12,878 13,699
Income taxes................ 3,414 3,743 13 169 344 249 3,151 3,494
---------- ---------- ------- ------- ------ ------ ---------- ----------
Net Income.................. $ 9,675 $ 9,896 $ (30) $ 252 $1,049 $ 791 $ 9,727 $ 10,205
========== ========== ======= ======= ====== ====== ========== ==========
Average common equity....... $ 75,569 $ 85,575 $ 8,320 $ 9,074 $2,862 $2,987 $ 45,176 $ 52,028
Risk-adjusted return on
equity..................... 12.8% 11.6% (0.4)% 2.8% 36.6% 26.5% 21.5% 19.6%
Total assets................ $1,074,192 $1,128,625 $53,312 $77,187 $1,693 $1,636 $1,338,282 $1,169,633
========== ========== ======= ======= ====== ====== ========== ==========
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
TOTAL
-----------------------
1999 1998
---------- ----------
(IN THOUSANDS, EXCEPT
RATIOS)
<S> <C> <C>
Net interest income......... $ 63,784 $ 64,630
Non-interest income......... 24,374 23,689
Non-interest expense........ 60,815 59,520
---------- ----------
Income before income
taxes...................... 27,343 28,799
Income taxes................ 6,922 7,655
---------- ----------
Net Income.................. $ 20,421 $ 21,144
========== ==========
Average common equity....... $ 131,927 $ 149,664
Risk-adjusted return on
equity..................... 15.5% 14.1%
Total assets................ $2,467,479 $2,377,081
========== ==========
</TABLE>
Community banking includes the deposit-gathering branch franchise along
with lending to both individuals and businesses. Lending activities include
commercial and commercial real-estate loans, residential mortgage loans, direct
consumer loans and credit cards. Mortgage banking includes the servicing of
mortgage loans and the origination of residential mortgage loans through a
wholesale broker network. The trust segment has two primary business divisions,
institutional trust and personal trust. Institutional trust products and
services include 401(k) plans, defined benefit and defined contribution employee
benefit plans, individual retirement accounts, and collective investment funds
for trade union pension plans. Personal trust products and services include
personal portfolio investment management, estate planning and administration,
custodial services and pre-need trusts. Financial services includes the sale of
mutual funds and annuities. The investment/parent includes the net results of
investment securities and borrowing activities, general corporate expenses not
allocated to the business segments, interest expense on corporate debt, and
centralized interest rate risk management.
23. CAPITAL
The Company is subject to various capital requirements administered by the
federal banking agencies. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. As of December 31, 1999, the Company met all capital
adequacy requirements to which it was subject. As of December 31, 1999 and 1998,
the Federal Reserve categorized the Company as "Well Capitalized" under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum total risk-based, Tier I risk-
based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Company's classification category.
63
<PAGE> 65
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ---------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- -------- -----
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL (TO RISK WEIGHTED
ASSETS) CONSOLIDATED............. $166,187 13.72% $96,872 8.00% $121,090 10.00%
U.S. BANK........................ 89,868 14.11 50,966 8.00 63,707 10.00
THREE RIVERS BANK................ 73,836 12.97 45,540 8.00 56,925 10.00
TIER 1 CAPITAL (TO RISK WEIGHTED
ASSETS) CONSOLIDATED............. 155,837 12.87 48,436 4.00 72,654 6.00
U.S. BANK........................ 84,614 13.28 25,483 4.00 38,224 6.00
THREE RIVERS BANK................ 68,740 12.08 22,770 4.00 34,155 6.00
TIER 1 CAPITAL (TO AVERAGE ASSETS)
CONSOLIDATED..................... 155,837 6.41 97,241 4.00 121,551 5.00
U.S. BANK........................ 84,614 6.42 52,681 4.00 65,851 5.00
THREE RIVERS BANK................ 68,740 6.21 44,280 4.00 55,350 5.00
======== ===== ======= ==== ======== =====
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
----------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ---------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- -------- -----
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) Consolidated............. $164,219 14.52% $90,472 8.00% $113,090 10.00%
U.S. Bank........................ 92,039 15.33 48,018 8.00 60,023 10.00
Three Rivers Bank................ 73,027 13.84 42,199 8.00 52,749 10.00
Tier 1 Capital (to Risk Weighted
Assets) Consolidated 153,494.. 13.57 45,236 4.00 67,854 6.00
U.S. Bank........................ 87,418 14.56 24,009 4.00 36,014 6.00
Three Rivers Bank................ 66,923 12.69 21,100 4.00 31,649 6.00
Tier 1 Capital (to Average Assets)
Consolidated..................... 153,494 6.62 92,680 4.00 115,850 5.00
U.S. Bank........................ 87,418 6.85 51,060 4.00 63,825 5.00
Three Rivers Bank................ 66,923 6.47 41,377 4.00 51,721 5.00
======== ===== ======= ==== ======== =====
</TABLE>
24. BRANCH ACQUISITION
On February 12, 1999, the Company and First Western Bancorp, Inc. (First
Western), completed an agreement for the Company to purchase three branch
offices in western Pennsylvania from First Western in exchange for cash and one
branch from the Company. The Company's U.S. Bank subsidiary acquired the
Ebensburg and Barnesboro offices of First Western which are located in Cambria
County. The Company's Three Rivers Bank subsidiary acquired the Kiski Valley
office of First Western located in Westmoreland County in exchange for Three
Rivers Bank's Moon Township office which is located in Allegheny County. On a
net basis, the Company acquired $91 million in deposits, $10 million in consumer
loans and the related fixed assets, leases, safe deposit box business and other
agreements at the branch offices. The Company paid a core
64
<PAGE> 66
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deposit premium of approximately $10 million for the acquired deposits and
purchased the consumer loans and fixed assets.
25. PROPOSED TAX-FREE SPIN-OFF PLAN
On July 12, 1999, the Company announced that its Board of Directors has
approved a plan to split the Company's banking subsidiaries into two separate
publicly traded companies. The plan would be effected through a tax-free
spin-off, and is expected to become effective April 1, 2000.
Under the proposed tax-free spin-off plan, 100% of the shares of the
holding company to be formed for Three Rivers Bank, to be known as Three Rivers
Bancorp, Inc., would be distributed as a dividend to the shareholders of the
Company in proportion to their existing Company ownership. Shareholders would
retain their existing Company shares. Standard Mortgage Company (SMC), a
mortgage banking company, currently a subsidiary of Three Rivers Bank, will be
internally spun-off from Three Rivers Bank to the Company prior to consummation
of the proposed Three Rivers Bank spin-off. For more information on the proposed
spin-off, see "Proposed Tax-Free Spin-Off Plan" in the MD&A.
26. PARENT COMPANY FINANCIAL INFORMATION
The Parent Company functions primarily as a coordinating and servicing unit
for all subsidiary entities. Provided services include general management,
credit policies and procedures, accounting and taxes, loan review, auditing,
investment advisory, compliance, marketing, insurance risk management, general
corporate services, and financial and strategic planning. The following
financial information relates only to the Parent Company operations:
BALANCE SHEET
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 286 $ 295
Equity investment in banking subsidiaries................... 145,110 177,274
Equity investment in non-banking subsidiaries............... 2,785 2,612
Guaranteed junior subordinated deferrable interest debenture
issuance costs............................................ 1,283 1,328
Other assets................................................ 1,481 991
-------- --------
TOTAL ASSETS................................................ $150,945 $182,500
======== ========
LIABILITIES
Short-term borrowings....................................... $ 3,500 $ 4,800
Guaranteed junior subordinated deferrable interest
debentures................................................ 34,500 34,500
Other liabilities........................................... 141 1,320
-------- --------
TOTAL LIABILITIES........................................... 38,141 40,620
-------- --------
STOCKHOLDERS' EQUITY
Total stockholders' equity.................................. 112,804 141,880
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $150,945 $182,500
======== ========
</TABLE>
65
<PAGE> 67
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME
Inter-entity management fees............................... $ 4,035 $ 3,961 $ 3,867
Dividends from subsidiaries................................ 17,061 16,819 19,601
Interest and dividend income............................... 20 68 15
-------- -------- --------
TOTAL INCOME............................................... 21,116 20,848 23,483
-------- -------- --------
EXPENSE
Interest expense........................................... 3,304 2,348 680
Salaries and employee benefits............................. 2,968 2,796 2,793
Other expense.............................................. 1,397 1,462 1,642
-------- -------- --------
TOTAL EXPENSE.............................................. 7,669 6,606 5,115
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES................................... 13,447 14,242 18,368
Provision for income taxes................................. 1,299 979 522
Equity in undistributed income of subsidiaries............. 5,713 5,967 4,667
-------- -------- --------
NET INCOME................................................. $ 20,459 $ 21,188 $ 23,557
======== ======== ========
STATEMENT OF CASH FLOWS OPERATING ACTIVITIES
Net income................................................. $ 20,459 $ 21,188 $ 23,557
Adjustment to reconcile net income to net cash provided by
operating activities:
Equity in undistributed income of subsidiaries............. (5,713) (5,967) (4,667)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 14,746 15,221 18,890
-------- -------- --------
INVESTING AND FINANCING ACTIVITIES
Common stock cash dividends paid........................... (11,586) (10,638) (9,318)
Proceeds from issuance of common stock..................... 292 534 453
Guaranteed junior subordinated deferrable interest
debentures, net of expenses.............................. -- 33,172 --
Guaranteed junior subordinated deferrable interest
debentures dividends paid................................ (2,916) (1,944) --
Purchases of treasury stock................................ (4,204) (30,346) (11,637)
Net (decrease)increase in borrowings....................... (1,300) (2,800) 2,800
Investment in subsidiaries................................. (50) (7,000) (600)
Other -- net............................................... 5,009 3,514 (34)
-------- -------- --------
NET CASH USED BY INVESTING AND FINANCING ACTIVITIES........ (14,755) (15,508) (18,336)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH EQUIVALENTS................ (9) (287) 554
CASH EQUIVALENTS AT JANUARY 1.............................. 295 582 28
-------- -------- --------
CASH EQUIVALENTS AT DECEMBER 31............................ $ 286 $ 295 $ 582
======== ======== ========
</TABLE>
66
<PAGE> 68
USBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The ability of subsidiary banks to upstream cash to the Parent Company is
restricted by regulations. Federal law prevents the Parent Company from
borrowing from its subsidiary banks unless the loans are secured by specified
assets. Further, such secured loans are limited in amount to ten percent of the
subsidiary banks' capital and surplus. In addition, the subsidiary banks are
subject to legal limitations on the amount of dividends that can be paid to
their shareholder. The dividend limitation generally restricts dividend payments
to a bank's retained net income for the current and preceding two calendar
years. Cash may also be upstreamed to the Parent Company by the subsidiary banks
as an inter-entity management fee. At December 31, 1999, the subsidiary banks
were permitted to upstream an additional $17,145,000 in cash dividends to the
Parent Company. The subsidiary banks also had a combined $158,347,000 of
restricted surplus and retained earnings at December 31, 1999.
The Parent Company renewed a $17 million unsecured line of credit on
December 21, 1999. This line of credit is subject to annual review on March 31,
2000. Future drawdowns on this line would be either at an "As Offered Rate" or
at a "Euro-Rate" Option, a rate equal to the LIBOR plus one hundred fifty (150)
basis points (1 1/2%) per annum. The Parent Company had available at December
31, 1999, $13.5 million of this total $17.0 million credit line. The agreement
for this line of credit requires the Company to maintain compliance with certain
financial covenants. The Company was not in compliance with the minimum loan
loss reserve to non-performing assets ratio as of December 31, 1999, however the
correspondent bank has waived this requirement.
67
<PAGE> 69
STATEMENT OF MANAGEMENT RESPONSIBILITY
January 21, 2000
To the Stockholders and
Board of Directors of
USBANCORP, Inc.
Management of USBANCORP, Inc. and its subsidiaries have prepared the
consolidated financial statements and other information in the "Annual Report
and Form 10-K" in accordance with generally accepted accounting principles and
are responsible for its accuracy.
In meeting its responsibility, management relies on internal accounting and
related control systems, which include selection and training of qualified
personnel, establishment and communication of accounting and administrative
policies and procedures, appropriate segregation of responsibilities, and
programs of internal audit. These systems are designed to provide reasonable
assurance that financial records are reliable for preparing financial statements
and maintaining accountability for assets and that assets are safeguarded
against unauthorized use or disposition. Such assurance cannot be absolute
because of inherent limitations in any internal control system.
Management also recognizes its responsibility to foster a climate in which
Company affairs are conducted with the highest ethical standards. The Company's
Code of Conduct, furnished to each employee and director, addresses the
importance of open internal communications, potential conflicts of interest,
compliance with applicable laws, including those related to financial
disclosure, the confidentiality of proprietary information, and other items.
There is an ongoing program to assess compliance with these policies.
The Audit Committee of the Company's Board of Directors consists solely of
outside directors. The Audit Committee meets periodically with management and
the independent public accountants to discuss audit, financial reporting, and
related matters. Arthur Andersen LLP and the Company's internal auditors have
direct access to the Audit Committee.
<TABLE>
<S> <C>
/s/ Terry K. Dunkle /s/ Jeffery A. Stopko
Terry K. Dunkle Jeffrey A. Stopko
Chairman, Senior Vice President &
President & CEO Chief Financial Officer
</TABLE>
68
<PAGE> 70
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
To the Stockholders and Board of Directors of USBANCORP, Inc.:
We have audited the accompanying consolidated balance sheets of USBANCORP,
Inc. (a Pennsylvania corporation) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of USBANCORP,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Pittsburgh, Pennsylvania
January 21, 2000
69
<PAGE> 71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable for the years presented.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this section relative to Directors of the
Registrant is presented in the Proxy Statement for the Annual Meeting of
Shareholders. Executive officer information has been provided in Item 1.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this section is presented in the Proxy Statement
for the Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this section is presented in the Proxy Statement
for the Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this section is presented in the Proxy Statement
for the Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS FILED:
The consolidated financial statements listed below are from the 1999 Form
10-K and Part II -- Item 8. Page references are to said Form 10-K.
CONSOLIDATED FINANCIAL STATEMENTS:
USBANCORP, Inc. and Subsidiaries
Consolidated Balance Sheet, 31
Consolidated Statement of Income, 32-33
Consolidated Statement of Comprehensive Income, 34
Consolidated Statement of Changes in Stockholders' Equity, 35
Consolidated Statement of Cash Flows, 36-37
Notes to Consolidated Financial Statements, 38
Statement of Management Responsibility, 67
Report of Independent Public Accountants, 68
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
These schedules are not required or are not applicable under Securities and
Exchange Commission accounting regulations and therefore have been omitted.
REPORTS ON FORM 8-K:
There were no reports on Form 8-K for the quarter ended December 31, 1999.
70
<PAGE> 72
EXHIBITS:
The exhibits listed below are filed herewith or to other filings.
<TABLE>
<CAPTION>
EXHIBIT PRIOR FILING OR EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER HEREIN
- ------- ----------- -----------------------
<C> <S> <C>
3.1 Articles of Incorporation, as amended on February Exhibit III, Part II to Form S-14
24, 1995. File No. 2-79639
Exhibit 4.2 to Form S-2
File No. 33-685
Exhibit 4.3 to Form S-2
File No. 33-685
Exhibit 4.1 to Form S-3
File No. 33-56604
3.2 Bylaws, as amended and restated on February 24, Exhibit IV, Part II to Form S-14
1995. File No. 2-79639
Exhibit 3.2
4.1 Rights Agreement, dated as of February 24, 1995, Exhibit 1 to Form 8-A
between USBANCORP, Inc. and USBANCORP Trust Company, Dated March 1, 1995
as Rights Agent.
10.2 Agreement, dated June 22, 1994, between USBANCORP, Exhibit 10.2 to 1994 Form 10-K
Inc. and Terry K. Dunkle. Filed March 22, 1995
10.3 Agreement, dated October 25, 1994, between Exhibit 10.3 to 1994 Form 10-K
USBANCORP, Inc. and W. Harrison Vail. Filed March 22, 1995
10.6 Loan Agreement, dated December 19, 1997, between Exhibit 10.6 to 1997 Form 10-K
USBANCORP, Inc. and PNCBANK. Filed March 24, 1998
10.7 Agreement, dated October 25, 1994, between Exhibit 10.7 to 1994 Form 10-K
USBANCORP, Inc. and Orlando B. Hanselman. Filed March 22, 1995
10.8 1991 Stock Option Plan, dated August 23, 1991, as Exhibit 10.8 to 1994 Form 10-K
amended and restated on February 24, 1995. Filed March 22, 1995
10.9 Agreement, dated December 1, 1994, between Exhibit 10.9 to 1994 Form 10-K
USBANCORP, Inc. and Ronald W. Virag. Filed March 22, 1995
10.10 Agreement, dated July 15, 1994, between USBANCORP, Exhibit 10.10 to 1994 Form 10-K
Inc. and Kevin J. O'Neil. Filed March 22, 1995
10.11 Collective Bargaining Agreement, dated October 16, Exhibit 10.1 to Form 8-K/A
1995, between United States National Bank in Dated March 1, 1996
Johnstown and Steel Workers of America, AFL-CIO-CLC
Local Union 8204.
22 Subsidiaries of the Registrant. Below
24.1 Consent of Arthur Andersen LLP
</TABLE>
71
<PAGE> 73
EXHIBIT A
(22) SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
PERCENT OF JURISDICTION
NAME OWNERSHIP OF ORGANIZATION
---- ---------- ---------------
<S> <C> <C>
U.S. Bank............................................ 100% Commonwealth of Pennsylvania
Main and Franklin Streets
P.O. Box 520
Johnstown, PA 15907
Three Rivers Bank and Trust Company.................. 100% Commonwealth of Pennsylvania
633 State Route 51, South
Jefferson Borough
P.O. Box 10915
Pittsburgh, PA 15236
United Bancorp Life Insurance Company................ 100% State of Arizona
101 N. First Avenue #2460
Phoenix, AZ 85003
USBANCORP Trust and Financial Services Company....... 100% Commonwealth of Pennsylvania
Main and Franklin Streets
P.O. Box 520
Johnstown, PA 15907
UBAN Associates, Inc. ............................... 100% Commonwealth of Pennsylvania
110 Regent Court, Suite 104
State College, PA 16801
</TABLE>
72
<PAGE> 74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
USBANCORP, Inc.
(Registrant)
By: /s/ TERRY K. DUNKLE
------------------------------------
Terry K. Dunkle
Chairman, President
and Chief Executive Officer
Date: February 25, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on February 25, 2000:
<TABLE>
<C> <S>
/s/ TERRY K. DUNKLE Chairman, President and Chief Executive
- ----------------------------------------------------- Officer; Director
Terry K. Dunkle
/s/ JEFFREY A. STOPKO Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer
Jeffrey A. Stopko
/s/ JEROME M. ADAMS Director
- -----------------------------------------------------
Jerome M. Adams
Director
- -----------------------------------------------------
Clifford A. Barton
/s/ MICHAEL F. BUTLER Director
- -----------------------------------------------------
Michael F. Butler
/s/ JAMES C. DEWAR Director
- -----------------------------------------------------
James C. Dewar
/s/ JAMES M. EDWARDS, SR. Director
- -----------------------------------------------------
James M. Edwards, Sr.
Director
- -----------------------------------------------------
Richard W. Kappel
/s/ MARGARET A. O'MALLEY Director
- -----------------------------------------------------
Margaret A. O'Malley
/s/ MARK E. PASQUERILLA Director
- -----------------------------------------------------
Mark E. Pasquerilla
/s/ JACK SEVY Director
- -----------------------------------------------------
Jack Sevy
/s/ THOMAS C. SLATER Director
- -----------------------------------------------------
Thomas C. Slater
/s/ ROBERT L. WISE Director
- -----------------------------------------------------
Robert L. Wise
</TABLE>
73
<PAGE> 75
U.S. BANK
OFFICE LOCATIONS
* Main Office Downtown
216 Franklin Street
P.O. Box 520
Johnstown, PA 15907-0520
(814) 533-5300
* Westmont Office
110 Plaza Drive
Johnstown, PA 15905-1286
(814) 255-6836
* University Heights Office
1404 Eisenhower Boulevard
Johnstown, PA 15904-3280
(814) 266-9691
* East Hills Office
1219 Scalp Avenue
Johnstown, PA 15904-3182
(814) 266-3181
* Eighth Ward Office
1059 Franklin Street
Johnstown, PA 15905-4303
(814) 535-8317
West End Office
163 Fairfield Avenue
Johnstown, PA 15906-2392
(814) 533-5436
* Carrolltown Office
101 Main Street
Carrolltown, PA 15722-0507
(814) 344-6501
* Barnesboro Office
4206 Crawford Avenue Suite 1
Northern Cambria, PA
(814) 948-9540
Ebensburg Office
104 S. Center Street
Ebensburg, PA 15931-0209
(814) 472-8706
* Lovell Park Office
179 Lovell Avenue
Ebensburg, PA 15931-0418
(814) 472-5200
Nanty Glo Office
928 Roberts Street
Nanty Glo, PA 15943-1303
(814) 749-9227
Nanty Glo Drive-In
1383 Shoemaker Street
Nanty Glo, PA 15943-1255
(814) 749-0955
* Galleria Mall Office
500 Galleria Drive Suite 100
Johnstown, PA 15904-8911
(814) 266-5969
* St. Michael Office
900 Locust Street
St. Michael, PA 15951-9998
(814) 495-5514
* Coalport Office
Main Street, P.O. Box 356
Coalport, PA 16627-0356
(814) 672-5303
* Seward Office
#1, Roadway Plaza
Seward, PA 15954-9501
(814) 446-5655
* Windber Office
1501 Somerset Avenue
Windber, PA 15963-1745
(814) 467-4591
Central City Office
104 Sunshine Avenue
Central City, PA 15926-1129
(814) 754-4141
* Somerset Office
108 W. Main Street
Somerset, PA 15501-2035
(814) 445-4193
* Derry Office
112 South Chestnut Street
Derry, PA 15627-1938
(724) 694-8887
* Mobile Branch
U.S. Bank operates a Mobile Bank Branch that circulates to various
businesses and locations throughout the Bank's service area on a scheduled
basis.
THREE RIVERS BANK
OFFICE LOCATIONS
* Boston Office
1701 Boston Hollow Road
McKeesport, PA 15135-1217
(412) 754-2014
Braddock Office
823 Braddock Avenue
Braddock, PA 15104-1737
(412) 351-0400
* Century III Office
269 Clairton Boulevard
Pittsburgh, PA 15236-1401
(412) 653-7199
* Washington Crown Center
1500 W. Chestnut Street
Washington, PA 15301-5856
(724) 228-0065
Glassport Office
600 Monongahela Avenue
Glassport, PA 15045-1608
(412) 664-8760
* Jefferson Borough Office
Route 51, South
P.O. Box 10915
Pittsburgh, PA 15236-0915
(412) 382-1000
Liberty Boro Office
3107 Liberty Way
McKeesport, PA 15133-2103
(412) 664-8707
McKeesport Office
500 Fifth Avenue
McKeesport, PA 15132-2503
(412) 664-8715
* Motor Bank
1415 Fifth Avenue
McKeesport, PA 15132-2427
(412) 664-8755
* Port Vue Office
1194 Romine Avenue
McKeesport, PA 15133-3532
(412) 664-8975
* Rainbow Village Office
1 Rainbow Village
Shopping Center
White Oak, PA 15131-2415
(412) 664-8771
* South Strabane Office
590 Washington Road
Washington, PA 15301-9621
(724) 225-9800
* University Office
2016 Eden Park Boulevard
McKeesport, PA 15132-7619
(412) 664-8780
Lawrenceville
4319 Butler Street
Pittsburgh, PA 15201-3094
(412) 681-8390
* New Kensington
2 Feldarelli Square
2300 Freeport Road
New Kensington, PA 15068-4669
(724) 335-9811
* North Side
600 East Ohio Street
Pittsburgh, PA 15212-5620
(412) 231-4300
* Northway Mall
8000 Mcknight Road STE 1102
Pittsburgh, PA 15237-3000
(412) 364-8692
* Monroeville
2681 Moss Side Boulevard
Monroeville, PA 15146-3315
(412) 856-8431
* North Versailles
Great Valley Shopping Center
500 Lincoln Highway
North Versailles, PA 15137-1526
(412) 829-1360
* Carrick
1817 Brownsville Road
Pittsburgh, PA 15210-3958
(412) 881-3500
* Bethel Park
2739 South Park Road
Bethel Park, PA 15102-3805
(412) 835-2100
* Finleyville
3576 Sheridan Avenue
Finleyville, PA 15332-1071
(724) 348-6626
* Jeannette
401 Clay Avenue
Jeannette, PA 15644-2124
(724) 527-1501
* = 24-Hour Banking Available
REMOTE
BANKING LOCATIONS
Main Office, Main & Franklin Streets, Johnstown
Lee Hospital, Main Street, Johnstown
The Galleria, Johnstown
Johnstown Cambria County Airport
Derry BP -- Pit Stop Quick Shop, Derry
Robyn's Shoppe, Nanty Glo
Ames, 7005 Clairton Rd., West Mifflin
Gogas Service Station, Cairnbrook
Community College of Allegheny County, North Campus, Pittsburgh
Community College of Allegheny County, Allegheny Campus, Pittsburgh
Foodland, Ohio Avenue, Glassport
Washington Mall, Oak Springs Road, Washington
74
<PAGE> 76
SHAREHOLDER INFORMATION
SECURITIES MARKETS
USBANCORP, Inc. Common Stock is publicly traded and quoted on the NASDAQ
National Market System. The common stock is traded under the symbol of "UBAN."
The listed market makers for the stock are:
Herzog, Heine, Geduld, Inc.
525 Washington Boulevard
Jersey City, NJ 07310
Telephone: (212) 908-4156
Legg Mason Wood Walker, Inc.
969 Eisenhower Boulevard
Oak Ridge East
Johnstown, PA 15904
Telephone: (814) 266-7900
F. J. Morrissey & Co., Inc.
1700 Market Street
Suite 1420
Philadelphia, PA 19103-3913
Telephone: (215) 563-8500
Keefe Bruyette & Woods, Inc.
Two World Trade Center
89th Floor
New York, NY 10048
Telephone: (800) 342-5529
CJBC World Markets
Oppenheimer Tower
200 Liberty Street
One World Financial Center
New York, NY 10281
Telephone: (212) 667-7000
Parker/Hunter, Inc.
416 Main Street
Johnstown, PA 15901
Telephone: (814) 535-8403
Sandler O'Neill & Partners, L.P.
2 World Trade Center
104th Floor
New York, NY 10048
Telephone: (800) 635-6860
Weeden & Co. L.P.
145 Mason Street
Greenwich, CT 06830
Telephone: (203) 861-7600
CORPORATE OFFICES
The corporate offices of USBANCORP, Inc. are located in the United States
National Bank Building at Main and Franklin Streets, Johnstown, PA 15901.
Mailing address:
P.O. Box 430
Johnstown, PA 15907-0430
(814) 533-5300
AGENTS
The transfer agent and registrar for USBANCORP, Inc.'s common stock is:
EquiServe
Investor Relations Department
150 Royall Street
Canton, MA 02021
1-800-730-4001
SHAREHOLDER DATA
As of January 31, 2000, there were 5,213 shareholders of common stock and
13,316,474 shares outstanding. Of the total shares outstanding, approximately
775,101 or 6% are held by insiders (directors and executive officers) while
approximately 4,988,126 or 37% are held by institutional investors (mutual
funds, employee benefit plans, etc.).
DIVIDEND REINVESTMENT
Shareholders seeking information about USBANCORP, Inc.'s dividend
reinvestment plan should contact Betty L. Jakell, Executive Office, at (814)
533-5158
INFORMATION
Analysts, investors, shareholders, and others seeking financial data about
USBANCORP, Inc. or any of its subsidiaries annual and quarterly reports, proxy
statements, 10-K, 10-Q, 8-K, and call reports -- are asked to contact Jeffrey A.
Stopko, Senior Vice President & Chief Financial Officer at (814) 533-5310.
75
<PAGE> 1
Exhibit 24.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 21, 2000 included in this Form 10-K, into USBANCORP, Inc.'s
previously filed Registration Statements on Form S-3 (Registration No.
33-56604); Form S-3 (Registration No. 33-50225); Form S-8 (Registration
No. 33-53935); Form S-8 (Registration No. 33-55845); Form S-8 (Registration No.
33-55207) and Form S-8 (Registration No. 33-55211).
/s/Arthur Andersen LLP
Pittsburgh, Pennsylvania
March 6, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 54,676
<INT-BEARING-DEPOSITS> 758
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,187,335
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,095,804
<ALLOWANCE> 10,350
<TOTAL-ASSETS> 2,467,479
<DEPOSITS> 1,230,941
<SHORT-TERM> 101,243
<LIABILITIES-OTHER> 981,138
<LONG-TERM> 41,600
0
0
<COMMON> 43,476
<OTHER-SE> 69,081
<TOTAL-LIABILITIES-AND-EQUITY> 2,467,479
<INTEREST-LOAN> 86,835
<INTEREST-INVEST> 78,232
<INTEREST-OTHER> 121
<INTEREST-TOTAL> 165,188
<INTEREST-DEPOSIT> 41,150
<INTEREST-EXPENSE> 99,504
<INTEREST-INCOME-NET> 65,684
<LOAN-LOSSES> 1,900
<SECURITIES-GAINS> 436
<EXPENSE-OTHER> 60,815
<INCOME-PRETAX> 27,343
<INCOME-PRE-EXTRAORDINARY> 27,343
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,421
<EPS-BASIC> 1.53
<EPS-DILUTED> 1.52
<YIELD-ACTUAL> 7.27
<LOANS-NON> 4,928
<LOANS-PAST> 1,305
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,725
<CHARGE-OFFS> 3,003
<RECOVERIES> 728
<ALLOWANCE-CLOSE> 10,350
<ALLOWANCE-DOMESTIC> 10,350
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,009
</TABLE>
